Borrowers that have good credit, some money in the bank, and some equity in their homes, are most likely suited to having a Conventional loan, meaning a loan that falls into either Fannie Mae of Freddie Mac guidelines. Often the more loan to value the better the rate on this type of loan.

Benefits to Conventional Loans

One benefit to having a Conventional loan is that there is neither an upfront mortgage insurance premium that FHA charges, which is typically 1.5% of the loan amount, nor the monthly mortgage insurance premium.

The total debt to income ratio for Conventional loans is near 50%, depending on other factors per Fannie Mae and Freddie Mac guidelines, versus around 43% for FHA.

This means that you could make less money and get the same mortgage loan amount with a Conventional loan than you would with FHA.

While there are still some no-income-verified Conventional programs available, FHA is always full documentation.

Benefits to FHA Loans

Looking at the credit side of this comparison, Conventional borrowers will need a credit score of at least 660 to qualify, and will be charged a premium, based on how close their score is to 660. FHA borrowers can in many cases be lower than 660, but another benefit to having FHA versus Conventional is the amount of vested interest a borrower has in a property.

FHA lenders will allow borrowers to make as little as a 3.5% contribution to the transaction; and this contribution can go toward expenses such as closing costs. Conventional lenders usually want borrowers a bit more vested.
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