Conventional vs. FHA Mortgages - Texas Homebuyer Comparison Guide

Conventional vs. FHA Mortgages - Texas Homebuyer Comparison Guide

Texas homebuyers typically choose between conventional mortgages and FHA loans. Each loan type has different down payment requirements, credit score minimums, interest rates, and insurance costs. Understanding the differences helps you select the right loan program with your mortgage broker.

Conventional Mortgages: Lower Rates for Qualified Borrowers

Conventional mortgages are loans that conform to Fannie Mae and Freddie Mac standards—not government-insured like FHA, VA, or USDA loans. Conventional mortgages typically offer lower interest rates when borrowers have strong credit, larger down payments, and steady income.

Conventional Loan Credit Score Requirements

Conventional loans typically require 620+ credit scores. However, most lenders set internal minimums at 640+. Some brokers access portfolio lenders who approve 620-639 scores with larger down payments or higher rates.

Down Payment Requirements

Conventional loans require:

• 20% down payment: No mortgage insurance (PMI)
• 10% down payment: 10-year PMI
• 5% down payment: 15-year PMI
• 3% down payment: 20-year PMI

The lower your down payment, the longer you pay PMI. On a $400,000 mortgage with 5% down, PMI costs $3,000-$4,000 annually for 15 years—adding $45,000-$60,000 to your total interest paid.

Interest Rates and APR

Conventional rates typically run 0.25%-0.75% lower than FHA rates for borrowers with 680+ credit scores. This advantage disappears for borrowers with credit scores under 680—FHA becomes competitive or better.

Debt-to-Income Limits

Conventional loans require your total monthly debt payments (mortgage, car loans, credit cards, student loans) divided by gross monthly income to not exceed 43% in most cases. Some portfolio lenders extend to 50% DTI for borrowers with strong compensating factors.

FHA Mortgages: Lower Down Payments for First-Time Buyers

FHA (Federal Housing Administration) loans are government-insured mortgages designed for first-time homebuyers and borrowers with credit challenges. FHA mortgages allow lower down payments and more flexible credit requirements than conventional loans.

FHA Loan Credit Score Requirements

FHA loans officially allow 500+ credit scores with 10% down payment. However, most FHA lenders require 580+ scores due to individual overlays. A few FHA specialists accept 500-579 scores but require manual underwriting and compensating factors.

Down Payment Requirements

FHA loans require:

• 580+ credit score: 3.5% down payment
• 500-579 credit score: 10% down payment

Unlike conventional loans, FHA mortgages require mortgage insurance regardless of down payment size. Even borrowers with 20% down pay FHA mortgage insurance.

FHA Mortgage Insurance Costs

FHA requires:

• Upfront Mortgage Insurance Premium (UFMIP): 1.75% of loan amount, added to your loan balance
• Annual Mortgage Insurance Premium (MIP): 0.3%-0.6% annually, added to your monthly payment

On a $400,000 loan, UFMIP costs $7,000 and adds to your loan balance. Annual MIP costs $1,200-$2,400 yearly. For 3.5% down loans, mortgage insurance lasts the life of the loan. For loans with 10%+ down, MIP drops off after 11 years.

Interest Rates and APR

FHA rates typically run 0.5%-1.0% higher than conventional rates for the same credit profile. However, when you include PMI on a conventional 5-10% down loan, total APR often aligns with FHA APR. The advantage depends on your specific situation.

Debt-to-Income Limits

FHA loans allow up to 50% DTI for borrowers with compensating factors (strong reserves, stable income, rental property income). This flexibility makes FHA attractive for self-employed borrowers and those with non-traditional income.

Conventional vs. FHA: Head-to-Head Comparison

Scenario 1: Well-Qualified Borrower (760+ Credit Score, $400,000 Loan)

• Conventional 20% Down ($80,000): 6.5% rate, $2,531/month, no PMI
• FHA 3.5% Down ($14,000): 7.2% rate + MIP = 7.75% effective rate, $2,710/month
• Winner: Conventional (save $179/month, $64,440 over 30 years)

The well-qualified borrower benefits from conventional’s lower rates and PMI avoidance.

Scenario 2: Good-Credit Borrower (660-679, $400,000 Loan, 10% Down)

• Conventional 10% Down ($40,000): 7.0% rate + 10-year PMI = 7.35% effective, $2,873/month
• FHA 3.5% Down ($14,000): 7.2% rate + MIP = 7.75% effective, $2,710/month
• Winner: FHA (save $163/month, costs less upfront)

Borrowers with 10% down and good credit often find FHA more affordable because PMI lasts 10 years while FHA MIP is lower on 3.5% down loans. FHA also requires $26,000 less upfront capital.

Scenario 3: Credit-Challenged Borrower (600-639, $400,000 Loan)

• Conventional: Difficult to qualify; requires manual underwriting
• FHA 10% Down: 7.5% rate + MIP = 8.0% effective, $2,942/month
• Winner: FHA (only viable option)

Borrowers with 600-639 credit scores may not qualify for conventional loans. FHA manual underwriting allows approval with compensating factors despite credit challenges.

When to Choose Conventional Mortgages

Choose Conventional If:

1. You have 660+ credit score and can afford 10%+ down payment. Conventional’s lower rates outweigh PMI costs.

2. You have 20% down payment. Eliminating PMI saves thousands annually compared to FHA’s required mortgage insurance.

3. You plan to refinance within 5-7 years. Conventional PMI drops off through refinancing, FHA mortgage insurance may persist through the loan term.

4. You’re self-employed or have non-traditional income. Some portfolio lenders with conventional programs accept self-employment and investment income more readily than FHA.

When to Choose FHA Mortgages

Choose FHA If:

1. You have 580-639 credit score. FHA’s flexible credit requirements make approval possible when conventional lenders reject you.

2. You’re limited to 3-5% down payment. FHA’s 3.5% minimum down is lower than conventional’s 3-5% options requiring 20-year PMI.

3. You plan to keep your home long-term (10+ years). FHA’s lower upfront cash requirement (3.5% down) outweighs mortgage insurance costs over extended ownership.

4. You have higher debt-to-income ratio. FHA allows up to 50% DTI; conventional limits to 43% in most cases.

5. You have non-traditional income or employment gaps. FHA’s manual underwriting evaluates compensating factors more favorably than conventional’s rigid automated systems.

Texas Mortgage Broker Rate Shopping for Conventional vs. FHA

When comparing offers, ensure brokers quote both conventional and FHA to find your best option:

Request FHA Quotes

• FHA 3.5% down rate
• FHA 10% down rate (if you’re considering 10% down option)
• Total effective rate including mortgage insurance

Request Conventional Quotes

• Conventional 3-5% down rate
• Conventional 10% down rate
• Conventional 15-20% down rate (if considering higher down payment)
• PMI costs and duration

Compare Total Cost

• Monthly payment (including PMI/MIP)
• Total closing costs
• Total interest paid over loan term
• When PMI/MIP drops off

Negotiate Based on Quotes

• If FHA MIP is high, negotiate lower rates from FHA lenders
• If conventional PMI is high, push portfolio lenders for better pricing
• Lock rates once you’ve selected your best option

Real-World Texas Example: Dallas Purchase

A Dallas buyer with $20,000 down payment ($300,000 loan), 650 credit score, evaluates conventional vs. FHA:

Conventional 7% Down ($21,000):

• Interest rate: 7.1%
• PMI: $265/month (15-year duration)
• Monthly payment: $2,150 (including taxes, insurance, PMI)

FHA 3.5% Down ($10,500):

• Interest rate: 7.3%
• Mortgage Insurance: $220/month (life of loan)
• Monthly payment: $2,080 (including taxes, insurance, MIP)

The FHA option saves $70/month, requires $10,500 less upfront capital, but costs more over 30 years (MIP doesn’t drop off). The conventional option costs more upfront but saves money long-term (PMI drops after 15 years).

For this buyer, FHA makes sense if cash is tight. Conventional makes sense if they plan to refinance in 7-10 years.

How Texas Mortgage Brokers Guide Your Choice

Professional mortgage brokers:

1. Understand your financial timeline. If you’re planning to refinance in 5 years, conventional PMI duration matters. If you’re staying 30 years, FHA’s lifetime MIP matters.

2. Run detailed payment scenarios. Brokers compare total cost including down payment, monthly payments, and long-term interest paid.

3. Access competitive lenders for both programs. FHA specialists and portfolio conventional lenders competing on price help you get the best rates for each loan type.

4. Explain trade-offs transparently. Brokers show you not just rates, but down payment costs, insurance duration, and when each program becomes more expensive.

5. Navigate credit improvement strategies. If you’re borderline between FHA and conventional, brokers might recommend waiting 3-6 months to improve credit and access conventional’s better rates.

Getting Started with Texas Mortgage Brokers

Compare conventional and FHA quotes from at least 2-3 Texas mortgage brokers to ensure competitive pricing. Ask brokers which FHA lenders they work with and which portfolio lenders they access for conventional pricing. The best rates come from brokers with extensive lender networks competing on both loan types.

Start your research at Browse Lenders and connect with Texas mortgage brokers today.