Owning a home is a dream for many. Whether it’s a townhouse in the city, a condo, or a single-family home, having a place to call your own is an exciting milestone. But buying a home is a complex process, even for those who have done it before. There’s a lot to consider, but at the top of the list should be the type of home loan you choose. Two of the most common options are conventional loans and Federal Housing Administration (FHA) loans.

Still, many buyers struggle to determine which loan works best for their situation. Understanding the benefits and drawbacks of each can help you make the right choice and give you peace of mind. Keep reading to learn more about FHA and conventional loans—and which one might be the best fit for you.

What Are FHA loans?

To understand what this kind of loan is, it’s helpful to know the background of FHA. As a division of the U.S. Department of Housing and Urban Development, the Federal Housing Administration (FHA) works to make homeownership more accessible from a financial point of view. They provide mortgage insurance for loans made by approved lenders, making it easier to obtain funding for those with lower credit scores.

FHA loans are loans insured by the FHA and function similarly to a cosigner for a car loan. In this case, the government will compensate the lender if any defaults on payments occur. Having the backing, so to speak, of an FHA loan helps low-income borrowers become approved and receive lower down payments. Most FHA loans require a minimum credit score of 589 to qualify and usually have a down payment as low as 3.5 percent of the home’s total cost.

Who Are FHA Loans For?

• First-time buyers
• Individuals with lower credit scores in the 500’s
• Individuals with limited savings

What Are the Benefits of FHA Loans?

There are lots of benefits to opting for an FHA loan, especially if you’re a first-time buyer. With an easier qualification process, you can become approved with little hassle and oftentimes much faster than other types of home loans. Flexible guidelines also mean you don’t have to have perfect credit to get your dream home. FHA loans are more forgiving and accept borrowers with lower credit scores and even those with higher debt-to-income ratios, making home buying more accessible. Down payments are another area that can be challenging with limited finances, but an FHA loan can help. Instead of fixed interest rates, FHA loans offer more competitive rates that can help you secure a lower monthly payment.

What Are the Drawbacks of FHA Loans?

The biggest disadvantage of an FHA loan is, by far, increased mortgage insurance premiums (MIPs). Since MIPs last the full term of the loan, having a higher premium can increase the overall cost of the loan, especially if the downpayment is low. FHA loans may also have stricter property requirements because of the government backing and can come with certain limitations.

What Are Conventional Loans?

As the name suggests, conventional loans refer to funding that is backed by common lenders such as banks and privately owned facilities. These types of loans are not connected to the FHA or insured by other government agencies, like the Department of Veterans Affairs or the Department of Agriculture, which provide loans. That said, conventional loans are more common and come from banks, credit unions, and online lenders. They offer flexibility in terms of interest rates but often have strict qualification requirements.

Who Do Conventional Loans Work For?

• Individuals with credit scores of 620 or higher
• Individuals with robust savings accounts

What Are the Benefits of Conventional Loans?

Conventional loans offer more flexibility across the board than FHA loans do, making for a wider selection of properties to choose from. They also have many financial benefits compared to an FHA loan since they require a higher credit score to secure. For example, lower interest rates and a lower overall cost of the loan. They also don’t usually require an upfront mortgage insurance fee, which can give you a more balanced monthly payment.

What Are the Drawbacks of Conventional Loans?

Conventional loans require you to have pristine credit to be approved. This means your credit score needs to be within the 600 range and up, and your debt-to-income ratio must also be well-balanced.