If you are preparing to buy a home, you need to make many decisions. You can explore different types of mortgages in the same way you can explore different properties.
The two most popular mortgages are traditional and FHA loans. They have many similarities, but they have different qualifications that make them suitable for different types of borrowers.
Here’s how to choose between the two loan types:
Comparison of FHA and traditional loans
Both FHA and traditional loans are mortgages born from private lenders. Both have either fixed or adjustable interest rates, and typically have a set number of loan periods of 15 or 30 years.
Traditional loans This is what most people think about when imagining a mortgage. They are available through the majority of US lenders, including banks, credit unions, savings, loan institutions, and online mortgage companies, and are not supported or guaranteed in any way by the government. Lenders take all risks of debt.
In contrast, FHA loans are insured by the Federal Housing Administration (FHA). U.S. Department of Housing and Urban Development (HUD). This means that the government will compensate lenders in the event that the borrower defaults on payments. FHA loans are aimed at home buyers who find it difficult to get a traditional loan and tend to have more flexible requirements than traditional loans.
The difference between FHA and traditional loans
| FHA loan | Traditional compatible loans | |
|---|---|---|
| Lowest credit score | 580 (3.5% reduction) or 500 (10% down) | 620 |
| Maximum debt income (DTI) ratio | Usually 43%, but compensation factors like the balance of a large savings account can be over 50%. | Usually 45%, but in some cases it can be up to 50%. |
| The lowest down payment | 3.5% (580 credit score) or 10% (with 500 credit score) | 3% for fixed-rate loans, 5% for adjustable loans |
| Loan restrictions | $524,225 in most regions | $806,500 in most regions |
| Mortgage insurance | Mortgage insurance premiums (MIPS) required for all loans | You will need the private mortgage insurance (PMI) required for loans under 20%. Removable |
| evaluation | Performed by FHA-requested and FHA-approved experts in accordance with specific HUD guidelines | Requires lenders to assess the value of the property against the selling price and is carried out by national licensing experts. |
| interest rate | FHA Loan Fees | Traditional loan fees |
Credit score
- Face A LAN: As low as 500
- Traditional loans: At least 620
One of the major differences between FHA and traditional loans is the requirement for credit scores. FHA loan borrowers can qualify for a low credit score of 500 or 580, depending on their head amount. A score of at least 500 should be reduced by 10%. Alternatively, if your score is at least 580, you can put just 3.5%. While traditional loan fits require a credit score of at least 620, many lenders will want to see a higher score. If you have good credit or good credit, traditional loans are often the better choice.
DTI ratio
- Face A LAN: It’s 43%, but up to 50%
- Traditional loans: Mostly 45%
The debt-to-income ratio is a measure of all debt (including mortgages) compared to monthly income. For compliant traditional loans, the maximum DTI ratio is 45% in most cases. For FHA loans, the maximum DTI ratio is usually 43%, but it can be up to 50%.
down payment
- FHA Loan: 3.5% with a credit score of 580 or above. 10% with a credit score of 500-579
- Traditional loans: Some loan types have a low 3%
Depending on your lender and program, some traditional loans require just 3% down payment.
With an FHA loan, if your credit score is at least 580, you can only drop 3.5%. If your score is below 580 but not below 500, you should lower it by 10%.
Loan restrictions
- FHA Loan: $524,225 in most regions
- Traditional loans: $806,500 in most regions
Depending on your location, choosing between an FHA and a traditional loan may befall the price of the home you want to buy. Note that both types of loans have a limit on the amount you can take out.
The traditional conforming loan restrictions set by federal housing finance agencies each year start at $806,500 in 2025, and reach $1,209,750 in the more expensive housing market. Traditional loans may exceed these limits, but at that time they are considered non-compliant jumbo loans.
FHA loan restrictions are also adjusted annually, with different restrictions based on location and property type. In 2025, FHA loan restrictions for single-family homes would be $524,225 in most markets and $1,209,750 in high-cost regions.
Mortgage insurance
- FHA Loan: Both the advance payments and annual MIPs required on all loans
- Traditional loans: PMI required for less than 20% borrowers
If you don’t have 20% of the home’s purchase price due to a down payment, you will need to pay for mortgage insurance whether you’re a traditional loan or an FHA loan. In any case, your premiums are usually part of your monthly mortgage payment.
FHA Mortgage Insurance Premium (MIPS) also includes a prepayment premium equal to 1.75% of the loan amount. Next, you pay a portion of your annual premium for each monthly payment. This premium is determined by the size of the down payment, the amount borrowed, and the length of the loan. It’s 15 years compared to 30 years.
If you pay at least a 10% down payment, your MIP will be removed after 11 years, but if you lower your down payment you will be paying for the life of your loan.
Traditional loan borrowers don’t have to pay their mortgage insurance forever. You can cancel once the borrower achieves 20% capital at the home. This threshold can be reached by paying off your loan balance according to your repayment schedule and making additional payments or getting a new valuation if the value of your home increases dramatically.
evaluation
- Face A LAN: It will be carried out by the FHA-requested and FHA-approved experts to secure the home.
- Traditional loans: It is requested by a lender and made by a third party to determine the value of the home.
When funding your home through a traditional mortgage, your lender will need a home assessment. The lender wants to ensure that the home is worth the amount that is expanding to you.
Meanwhile, FHA lenders require a more thorough assessment process. It is designed so that the properties comply with HUD standards. This can take longer than traditional valuations and may encourage sellers to choose other offers if they are in a competitive market.
interest rate
- FHA Loan: The interest rate may be low, but the fees may be higher
- Traditional: The interest rate may be high, but the fees may be lower
With both types of loans, the lender sets an interest rate that is primarily determined by your credit score. That said, there may be some differences between FHA and traditional rates. You’ll want to get quotes from your lender before making a decision.
FHA loans may have more interest rates than traditional loans, but the difference is often offset by fees including MIP charges. If you are comparing FHA to traditional rates, check the annual rate (APR) (APR) for each loan (including both the costs of all fees) as the FHA loan loans may actually be higher than that of a comparable traditional loan.
Do I need to get an FHA or a traditional loan?
When comparing FHAs with traditional loans, the best ones will depend heavily on you and your financial profile.
If your credit score is below 620, an FHA-backed loan may be your only option. Also, if you can’t manage a 20% down payment, it can be even more difficult with today’s high home prices.
“The biggest difference between FHA and traditional is the down payment. FHA fees are usually lower and more flexible against drops,” says Phil Crescenzo Jr., vice president of Southeast Division, Nation One Mortgage Corporation.
For buyers who have the ability to pay a 20% down payment, there is a much less profit in seeking an FHA mortgage unless they are able to qualify for a traditional mortgage due to either a credit score issue or a previous bankruptcy. “In these cases, FHA loans are optional, but only if they are approved (issues),” says Cressenzo.
Of course, lower down payments cost more. “Most FHA loans have mortgage insurance over that period, which is a drawback for some,” says Crescenzo. However, premiums can be lower than those incurred with traditional mortgages under 20% “because this cost is limited on FHA loans.”
When should I choose an FHA loan?
FHA loans are a good option if you:
- Have a credit score below 620
- There’s little down payment
When should you choose a traditional loan?
In your case, go for a traditional loan:
- Has a credit score of over 620
- I have a bigger down payment
- Have monthly debt of less than half of your income
- I want a home that exceeds the FHA loan limit in your area
