FHA vs. Conventional Loans: The Best Choice for Investors
When financing your first investment property (especially if you plan to house hack), you'll likely face a choice: FHA or Conventional? One isn't universally better than the other; it depends entirely on your credit, cash on hand, and long-term goals.
Table of Contents
1. The Basics
| Feature | FHA Loan | Conventional Loan |
|---|---|---|
| Down Payment | Min 3.5% | Min 3% (5% for multifamily) |
| Min Credit Score | 580 (500 with 10% down) | Typically 620+ |
| Mortgage Insurance | For life of loan (usually) | Drops off at 20% equity |
2. FHA Deep Dive
The Federal Housing Administration (FHA) insures these loans to help people with lower credit or savings buy homes.
Pros for Investors
- Lenient Qualification: Higher Debt-to-Income (DTI) ratios are allowed.
- Low Down Payment: 3.5% down works for 1-4 units.
Cons for Investors
- MIP Forever: Unless you put 10% down, the annual Mortgage Insurance Premium (MIP) stays for the life of the loan. You have to refinance to get rid of it.
- Self-Sufficiency Test: For 3-4 unit properties, the rental income must cover the PITI payments, which can be hard to pass in high-cost areas.
3. Conventional Deep Dive
backed by Fannie Mae or Freddie Mac, these are the standard bank loans.
Pros for Investors
- Remove PMI: Once you hit 20% equity, Private Mortgage Insurance (PMI) falls off automatically.
- Better Appraisals: No strict FHA health/safety inspections that can kill deals.
Cons for Investors
- Harder to Qualify: Strict credit and DTI requirements.
4. The Verdict
Choose FHA if: Your credit score is under 680, you have high DTI, or you want to buy a 3-4 unit property with minimal cash.
Choose Conventional if: You have good credit (700+) and want to avoid paying mortgage insurance forever.
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