FHA or Conventional Loan? Go Conventional If You Qualify, Experts Say

Before the current housing boom, a mortgage preapproval letter in hand and a reasonable offer were enough to submit a winning bid on a new home. 

That’s not the case today, when there are more buyers than there are homes to go around. With the fierce competition and bidding wars common among home buyers, the type of home loan you choose has become more important than ever. 

While conventional loans are always a popular option, FHA loans are easier to qualify for if you have less-than-perfect credit. But you may find it more challenging to land the home of your dreams with an FHA loan in today’s market. 

“Sellers are very leery of accepting FHA loans these days because of requirements that may come up and the appraisal addendum that comes with it,” says Brian Chinn, a Realtor and team leader with The Brian Chinn Team at eXp Realty.

Still, it’s good to explore your options and consult with a mortgage professional before deciding on a loan product. It’s possible to purchase a home that works for you with the right real estate professional and lender on your side, regardless of the loan type. 

Here’s what you need to know about FHA and conventional loans before speaking with potential lenders. 

What’s the Difference Between an FHA and Conventional Loan?

Conventional loans are popular mortgage products backed by private lenders. FHA loans are offered by approved lenders and backed by the Federal Housing Administration (FHA), a division of the U.S. Department of Housing and Urban Development (HUD). 

Lenders generally impose more stringent qualification criteria for conventional loans to protect their financial interests. Compared to an FHA loan, there’s less of a safety net for the lender to fall back on if the borrower defaults, which means the lender will have to absorb the loss. 

“Overall, FHA loans may have more rigid property standards and require a higher down payment, while conventional loans allow a lower down payment but higher credit score to get started,” says Bill Lyons, CEO of Griffin Funding.

With an FHA loan, you’ll be on the hook for mortgage insurance. You can avoid mortgage insurance on a conventional loan by putting at least 20% down or canceling it once you have 20% in home equity.