FHA Loan vs Conventional Loan 2025

Most homebuyers think that FHA loans are just for those with bad credit and no money down, while at the same time thinking conventional loans are the only way to go. Well, what if I told you they're wrong and in today's video, I'm going to prove it. The reality is you could be choosing the wrong loan program and it's likely costing you thousands of dollars just because of this myth. So do you think you know which loan is better for you? Well, make sure you stick around because the numbers might actually surprise you. The purpose of today's video is really two things. To show you the differences between FHA loans and conventional loans, while comparing scenarios at 3%, 5%, and 10% down, while showing you real payments to help you as a viewer decide which loan program is best for you. Before we get started though, there's a couple of housekeeping items I want to get out of the way and these are things that I often hear that are clearly just misunderstood. FHA loans and conventional loans are available to any type homebuyer, not just first-time homebuyers. In fact, you can be a borrower that owns multiple properties and use both FHA and conventional. And at the same time, I want to point out one of the biggest benefits of an FHA loan is not only the minimal down payment and the fact that it allows lower credit scores, but also that FHA typically has interest rates at least 0.5% lower than those of conventional loans. And while there are some downsides to using FHA, we're going to break everything down so that you fully understand both programs and know the pros and cons of each. The first comparison I want to talk about on FHA vs conventional is down payment. FHA is typically known as the minimal down payment option. That's why it often gets referred as a first-time homebuyer loan and that's because they allow a minimum down payment when it comes to buying a home. You only need a minimum of 3.5% down as long as you have a 580 or better credit score to buy a home with FHA. In fact, you can go down as low as a 500 credit score if you have at least 10% down. But here's something I want to be very, very clear on right from the start. If you have a 580 credit score and you're coming in with a minimum down payment of just 3.5%, you're going to find it very, very difficult to get that loan approved. Yes, FHA says this is the guidelines, but the reality is a lot of lenders out there necessarily stick to FHA's guidelines. They have overlays on their programs that require higher credit scores in order to do this minimal down payment option. Now, with that said, that doesn't mean you can't go in and put 3.5% down if you have a 580 credit score because there are lenders out there that don't have these overlays that still allow these minimum credit score options. But the reality is they're few and far between and you're often going to pay for that option in a much higher interest rate. So in my opinion, it makes way more sense to take a step back, back yourself away from the home buying process and rather work on your credit score than try to force yourself into a home with a 580 credit score because it's only going to take you three, four, maybe five months in order to improve your score enough where you can really get the best interest rates out there that FHA has to offer. And the primary reason I bring this up is because a lot of people contact me on my videos and they say, Hey, I've got a 580 credit score. I've got 3.5% down, but I'm not getting approved. And the reality is lenders are looking for compensating factors. Typically when you have the minimal credit score requirements, when you have the minimal down payment requirements, they want to see other things. They want to see that you have additional money in the bank, even though you might not be using it, that sort of thing. In fact, the lower your credit scores, the more difficult it's going to be to get automated underwriting to actually approve your loan, which means somebody is going to have to manually underwrite it. And when they manually underwrite a loan, they go into way more detail than they would in the automated underwriting system. So just understand that everything you do when it comes to buying a home is based off your credit score. The higher your credit score, the easier that process is going to be. Conventional loans also allow you to purchase with as little as 3% down, but that's not typically how most people think of conventional loans. Typically when they think conventional loans, they're thinking 5, 10, 20% down. But the reality is you can do a conventional loan with as little as 3% down. But as you're going to see, as we start to break down the numbers, FHA is still much more likely to offer you a lower down payment, even though you're putting less money down with conventional. In fact, the better your credit scores and the more money you put down, the better conventional loans are actually going to look. Now, a moment ago, I talked a lot about FHA and credit scores, but one thing I didn't mention is that lenders are going to use the lower of the borrowers that are going on the loan. So if you have two people buying a home together, let's just say a husband and a wife are buying a home together and the husband has a credit score of 620 and the wife has a credit score of 780, they're going to use the lower of the two credit scores. So they're going to take the middle of all three scores. So when you buy a home, the lender is going to pull your credit report. Now, typically speaking, you're going to have three credit scores. You're going to have one with TransUnion, one with Experian, and one with Equifax. And what they do is they take the middle of all three of those scores. They don't average them together. Let's just say, for example, the wife had a 780, 800, and a 760. They're going to use that 780. And this is really, really important to know because if you're buying a home with someone that has worse credit than you, it's going to affect not only your ability to qualify, but it's going to affect your interest rate, how much you're approved for, everything that goes along with it. So before you go tie the knot with your significant other or decide to buy a house, you might want to ask them their credit score just so you don't come to regret it down the road. Now, I'm joking, but the reality is credit has that much of an impact where it is truly that important and something you have to pay attention to. Now, earlier we talked about the minimum credit score with FHA being 500 if you have at least 10% down and a 580 credit score if you have at least 3.5% down. Well, conventional loans are a little bit different. You need a minimum credit score of at least 620. Now, the 620 applies across the board. If you're putting at least 3% down, you need a 620. Now, conventional loans don't allow a down payment under 3%. So 620 is really the bottom that conventional allows. But at the same time, you'll need a 780 credit score with conventional in order to get the best terms. Whereas with FHA, if you have at least a 660, you're probably getting the best terms out there. So when it comes to credit, FHA is way more lenient. But also understand that the higher your credit score, the easier it's going to be to qualify, the more flexible it's going to be, the higher you're going to be able to take those debt-to-income ratios that we're going to talk about here in just a minute. Now, one quick takeaway is that if you have under a 680 credit score, chances are FHA is always going to be the best option for you. As it's not only going to offer lower rates, it's also going to offer easier loan approvals. But like I said earlier, rather than rush into the home buying process, it's really, really important to work on your credit if you have time to do it, because it's going to put you in a much better position when it comes to qualifying. Now, before we talk about mortgage insurance, which is probably the biggest drawback when it comes to FHA loans, I just want to make sure I note that this video is for novelty purposes only. Don't just take this information, run with it, do the calculations, think you qualified, go write an offer on a home without actually talking to a lender, go through the process, have a look at your credit scores, have a look at your pay stubs, your income, your documentation, all of that stuff to make sure you actually meet the guidelines to buy a home. Now, with that said, when it comes to FHA, you need to make sure you're working with a broker. Don't just go out and Google mortgage broker and call the first person you see, rather get a trusted referral, somebody that actually understands the business. In fact, my team and I have helped hundreds of people here on YouTube and we can help you too. So if you're new to this process, you're going through the process, you're trying to get a second quote, whatever it is, make sure you use that link in the description. You can talk to my team and we can ultimately help guide you through that process. Remember the pre-approval process is free. You should never be paying a fee and having a conversation with a lender or when comparing rates. So if you want to talk to somebody that has your best interest in mind, make sure you use that link below. So now I want to talk about mortgage insurance. What is mortgage insurance? Mortgage insurance is essentially an insurance put on your loan by the lender because you're putting less than 20% down. Whenever you buy a home and you put at least 20% down, you don't have mortgage insurance on that loan. But if you're putting less than 20% down, you're going to have mortgage insurance. Now this is separate from your homeowner's insurance because this insures the lender in case you end up defaulting on that loan because you're putting less than 20% down. The lender sees you as a higher risk and therefore requires insurance so that in case you default, they actually get paid back for that loan. Now, with that said, it's important to understand with an FHA loan, mortgage insurance is required on every single loan, regardless of your credit score, regardless of how much money you're putting down. And that mortgage insurance is going to stay on that loan for the life of the loan unless you put at least 10% down when you buy that home. If you put 10% down when you're buying and you're using an FHA loan, that mortgage insurance will fall off after year 11. But at no point until year 11, will that mortgage insurance fall off even if you have 20% equity in that property. And that's one of the biggest differences of FHA versus conventional. But if you're putting just 3.5% down, that mortgage insurance is going to stay on that loan for the life of the loan. And it's 0.55% of whatever your base loan amount is. Now, we'll do a calculation a little bit later in the video. But in addition to that monthly mortgage insurance, this is probably the biggest drawback when it comes to FHA is that you're also going to have upfront mortgage insurance. And understand this is also required on every single FHA loan, regardless of your down payment, regardless of your credit score. If you get an FHA loan, you're going to have upfront mortgage insurance. And at the time of this video, that is 1.75% of your base loan amount, which means if you're buying a $500,000 home and you're using an FHA loan, that means you're putting $17,500 down. That's 3.5%, which would normally mean that you're going to finance $482,500. But here's the thing. This is where the upfront mortgage insurance comes in. They're going to multiply that by 1.75%, which gives you $8,444. That's going to be added back onto your loan. So you're actually financing $490,943, which means that you basically lost about half of that 3.5% down payment that you put down to buy that home. But here's my thoughts on that. If you couldn't buy a house otherwise, if you couldn't go with any other loan program and FHA was the only option, it's simply the cost of doing business. So yes, you can actually wait until you have more money to do a conventional loan, which for some people means months, in some cases, years, or you can buy a home with the money that you have down now, knowing that you're giving some of that back with the ability to be able to buy a home with a minimal down payment. But this is where conventional differs. Conventional doesn't have any upfront mortgage insurance. So if you're buying a home and you're using conventional and you're putting the minimal down payment of 3% or say you're using 5% or 10% down, you're going to have monthly mortgage insurance. You're not going to have that upfront mortgage insurance, which means if you put 3% down, you're still going to have your full 3% equity in that property. But with that said, it's often going to result in a higher monthly payment, which we're going to look at here in just a minute. But one thing to understand about conventional that's much different than FHA is that the monthly mortgage insurance is going to vary by your credit score. It's going to vary by your debt to income ratio, and it's going to vary by your loan structure amongst other things. But what's cool about conventional is the higher your co-borrowers credit score and the more money you're putting down, the less that mortgage insurance is going to be. And another big difference when it comes to conventional loans is that once you get 20% equity in that property, you can typically call your lender and have them do some sort of automated valuation, some sort of broker price opinion, or some cases an appraisal. And if they see that the equity is there in that property, then they'll remove that mortgage insurance. Or maybe you don't want to go that route and you just want to continue paying down your loan. Well, once you hit 22% equity in that property from your actual amortization schedule, then that mortgage insurance will fall off automatically. So just a quick recap that FHA offers stable mortgage insurance regardless of your credit score, whereas conventional loans offer a lot more flexibility if you have a strong credit profile. The next thing I want to talk about is your debt to income ratio. This is probably where FHA has the biggest benefit because it's the most lenient when it comes to your credit profile than any other loan program out there. In fact, they allow you to have more monthly debt and qualify for more home than any other loan program out there. So the question I often get is what is your debt to income? Well, it's your monthly debts that show up on your credit report. Things like your car payments, your credit cards, any sort of installment loans versus the income that you make. One reason the FHA is so lenient is because they'll allow you to go 47% of your income towards housing expenses and another 10% towards other debts, which basically means they allow you to go to a 47% debt to income ratio on your front end and 57 on your back. So if you didn't catch that, your front end ratio is just your housing expenses. Anything that's associated with that housing payment, your principal and interest, your property taxes, your homeowner's insurance. If there's an HOA, if there's mortgage insurance, that's essentially what's factored in. Now what they aren't taking into account is your light bill, your cable bill, your phone bill, anything else that's on that house doesn't matter. So that essentially makes up the front end ratio. Well, the back end ratio is all of that housing expense stuff that we just mentioned, plus the things that show up on your credit report, your car payments, your credit cards, your installment loans, doesn't take into account your daycare, how much you spend on date night, any of that stuff, just the stuff that shows up on your credit report. So in the case that you make $100,000 a year, they're going to take that number. They're going to divide it by 12. They're going to give you $8,333 towards your gross monthly income. It's your gross before any taxes come out. The lender doesn't care how much you pay in taxes unless you're self-employed. If you're self-employed, it's going to be a little bit different. It's a different calculation. But if you're a W-2 employee, they're just going to take your annual income and divide it by 12. That's your income. And then you're going to take that income in the case of $8,333, and they're going to multiply by 47%, which means that your housing expenses could be as high as $3,917 on your front-end ratio with FHA. And you could have about another $800 in debt because your back-end ratio is $4,750. Now, this is a lot different than conventional because conventional really only has one ratio, and that's 49.99%. But in order to hit those ratios with conventional, you really need the best credit scores out there. You need compensating factors, which means you need more money in the bank than you have for down payment than you have for closing costs. In fact, anything that makes your credit profile look stronger is probably going to be required in order to get those maxes when it comes to conventional financing. But if you could get them improved, then your max front-end and back-end ratio would be $4,083. Now, if you had zero debt, your front-end ratio and your back-end ratio would essentially be the same. Now, if you had debts on top of that, then you could never go to the max on the front-end because of the caps that conventional puts on it. But understand, the lower your credit score, the harder it is to get high DTIs approved, especially when it comes to conventional financing. Now, that's going to put me talking about loan limits. There's a difference in loan limits depending on where you are in the country, and there's a difference between FHA and conventional. FHA loan limits actually vary by counties. So, depending on what county you're in is going to determine what your loan limits are. Now, instead of going over all of these, I'll put a link in the description where you can actually type in your state and county and get your actual loan limits. But with that said, FHA has low cost limits and high cost limits. In fact, there's limits in between those two as well. But what I'll do is I'll actually throw the low cost limits on the screen here and the high cost limits on the screen here. And one thing to note about that is it varies by unit. So, if you buy one unit, two units, three units, four units, you're going to have a different max loan amount with both FHA and conventional. Now, one nice thing about conventional when it comes to loan limits is that if you're in a low cost area, you're generally going to have higher loan limits with conventional than you are FHA. Now, with that said, here are the base conventional loan limits and here are the high balance conventional loan limits. Now, when it comes to property requirements, FHA and conventional are more or less the same. The biggest difference in FHA and conventional when it comes to property requirements are condos have to be FHA approved. Whereas with conventional, there's not really an approval process. But with that said, they just can't be on the non-warrantable list. Otherwise, you'll have to do some other type of financing. So, for the most part, they're the same. FHA is a little bit more strict when it comes to appraisals because the appraiser is also going to look for health and safety items while they're there versus conventional appraisers do not do that. So, health and safety items are things like lead-based paint, peeling paint, the property needs to have a heater, it needs to have working appliances, that sort of thing. Now, most properties are typically going to qualify for FHA. I've been this 20 plus years and I've rarely had a property that doesn't meet the FHA loan requirements. So, in my eyes, this really isn't an issue. Now, it is an issue if you find a property that's a complete fixer-upper and FHA actually has a different loan for that that you can do. It's called an FHA 203k. So, if you're looking at buying a property that needs a lot of work and you're trying to use FHA, then the 203k loan is going to be your best option. But otherwise, with FHA, you really shouldn't have an issue. Now, the last thing I want to talk about before going over these different monthly payments is income and employment. Income and employment is going to be required whether you get an FHA loan or a conventional loan. If you're not employed, you're not going to be able to get financing regardless of which type of loan program you're trying to get approved for. Lenders typically want to see you have at least two years of consistent income and consistent employment. Now, with that said, you could have changed jobs, you could have been laid off, got a new job, you could have changed careers. And with that, there are no income minimums and no maximums with either of these loan programs. But both are going to require that you actually have a job. But the one biggest difference in the two loan programs is that if you've been laid off or you have any sort of gap of employment, FHA is going to want to see that you're back on that job for at least six months before they'll actually consider that income, whereas conventional is a little more lenient. But this is one of those things that if you have any questions at all about any of the things that we've talked about so far, make sure you talk to a lender, just have the conversation. So instead of going out there and Googling a mortgage broker, make sure you reach out to our team, have a conversation with an actual professional, somebody that understands FHA, it can ultimately guide you through the process. If you'd like that link, it's in the description below. Now the moment you've all been waiting for, we're going to break down payments based on a $500,000 purchase price using FHA and conventional. Now we're going to talk about 3.5% down, 5% down and 10% down with FHA. And we're going to talk 3% down, 5% down and 10% down with conventional. Now with that said, there's some things to assume across the board, so we don't have to keep repeating ourselves. Anytime we talk about financing with FHA, we're using an interest rate based on today's rates of 6.25%, whereas conventional is going to be 6.875%. So as of today, conventional is about 5.8 higher credit score than that of FHA. Also, I'm using property taxes at 1.1%. The reason I'm using 1.1% is because that's the nationwide average. I'm located here in California. Ours is about 1.1% where I'm located, whereas states like Texas and Florida and even New York can have much higher property taxes. So you just have to make sure you're factoring that into your equation. Or again, make sure you're just talking to a knowledgeable mortgage broker who understands all of this and they can guide you in the right direction. There's a link in the description. Last thing I'm using 0.55% for monthly mortgage insurance with FHA, whereas with conventional, it's going to vary based on the down payment. The last thing is we're using $145 for your homeowner's insurance every month. That's based off a calculation of 0.0035%, which is what most lenders out there are going to use. Now again, depending on where you're located in the country, that number might be way higher than that. It might actually be lower than that. But for today's video, we're using $145. So what we're going to do now is we're going to talk about FHA putting 3.5% down at a $500,000 purchase price, which basically means you're putting a down payment of $17,500. Once you've factored in the upfront mortgage insurance we discussed, you're financing $490,943. At an interest rate of 6.25%, your monthly payment is $3,023 per month. Your property taxes are going to be $458. Your homeowner's insurance is going to be $150. And your monthly mortgage insurance is going to be $225, which means your total monthly payment is $3,856. Now let's compare that to a conventional loan putting just 3.5% down. Now that's going to be a difference of about $2,500 less on the down payments because you're only putting $15,000 down, which means you're actually financing $485,000. Now the biggest difference here is that your interest rate is going to be 6.875%, which gives you a total mortgage payment of $3,186. Again, your property taxes are going to be $458. Your homeowner's insurance is $150. And like I said earlier, we're using credit scores above 780, which means your mortgage insurance is going to come out to $121, which is going to give you a total monthly payment of $3,911, which is a difference of about $55 more than that of FHA, even though you put less down. Now let's go back to FHA and say that you're putting 5% down. Well, that's going to be a down payment of $25,000. But once you add the upfront mortgage insurance of $8,312 in, you're actually financing $483,312. And at 6.25%, that's going to give you a monthly mortgage payment of $2,976. The property taxes are still the same at $458. Your homeowner's insurance is still the same at $150, but your monthly mortgage insurance is going to be slightly less at $221, which gives you a total monthly mortgage payment of $3,806. Now let's compare that to a conventional loan, putting 5% down. Again, it's a $25,000 payment, which means you're financing $475,000. The interest rate is still 6.875, which gives you a total monthly mortgage payment of $3,120. The property taxes are going to remain at $458. Your homeowner's insurance is still going to be $145 a month. But the biggest difference here is that your monthly mortgage insurance now drops to $75, giving you a total monthly payment of $3,799, which is just slightly less than that of FHA. Now, in most cases, once you have 10% down, most people are not going to do an FHA loan. They're going to go with a conventional loan, but I want to compare the two anyway, just so you can see the difference. With FHA, the payment would be $3,633, whereas with conventional, it would be $3,616. So while there's not a big difference in that monthly payment, the biggest difference is that you're not eating up part of your down payment with that monthly mortgage insurance. So hopefully this video provides a lot of clarity when comparing FHA to conventional loans. If you found any value at all, do me a favor and hit that thumbs up. If you want to stay updated on more videos like this, do me a favor and subscribe to the channel. And if you want more information on FHA to see if it's the right loan program for you, do me a favor and check out this video here.