Conventional 97 Mortgage vs. FHA Mortgage: Which is Better?

Large 2-story house with a three car garageAre you torn between the Conventional 97 loan and an FHA loan for your home financing needs? Look no further!

This comprehensive guide will compare the conventional 97 loan and FHA loan programs, highlighting the key differences and considerations to help you make an informed decision. Both options offer attractive features for borrowers, but understanding the nuances can significantly impact your homeownership journey.

From down payment requirements to mortgage insurance and credit score considerations, we'll explore the factors that set these loan programs apart. So, let's dive into the conventional 97 loans and FHA loan comparison and discover which option best suits your financial goals.

Here's a comparison of FHA Loans and Conventional 97 Loans:

 FHA Loans:

  • Down payment: as low as 3.5%
  • Credit score: as low as 580
  • Debt-to-income ratio: as high as 50%
  • Mortgage insurance is required for the life of the loan.
  • No first-time home buyer requirement
  • Upfront mortgage insurance premium: 1.75% of the loan amount

Conventional 97 Loans:

  • Down payment: 3%
  • Credit score: typically 620 or higher
  • Debt-to-income ratio: typically no higher than 45%
  • First-time home buyer requirements
  • Mortgage insurance is required until the LTV reaches 78%.
  • Upfront mortgage insurance premium: not required

It's important to note that these guidelines may vary depending on the lender and the specific loan program. It's always best to check with the lender or loan officer for the most up-to-date and accurate information. It's also important to consider your circumstances and which loan program best suits your needs.

Minimum Credit Score

Conventional 97 Minimum Credit Score

The minimum credit score for a Fannie Mae Conventional 97 loan is 620. A credit score 620 is considered "fair" and is on the lower end of the spectrum for conventional mortgage loan approvals.

However, lenders are permitted to require a higher credit score. As a general rule, a minimum credit score of 640 is required.

Remember that having a higher credit score can help you qualify for a lower interest rate and better loan terms and give you more options among different loan programs.

If your credit score is below 620, it may not be easy to qualify for a conventional 97 loan, and you might consider other loan options or work on improving your credit score before applying for a mortgage. It's important to note that guidelines may change over time, and different lenders may have other credit score requirements. It's recommended to check with your lender for the most current credit score requirements and guidelines.

FHA Minimum Credit Score

For an FHA loan, the minimum credit score is 500, with a 10% down payment. However, if the credit score is 580 or greater, the down payment requirement is only 3.5%. FHA financing has more lenient credit requirements compared to the conventional 97 loans.

Debt to Income Ratio

Conventional 97 Debt-to-Income Ratio

The borrower must meet the required debt-to-income (DTI) ratios. Although Fannie Mae does not explicitly state the DTI requirements for a conventional 97 loan, the standard DTI ratio is 43% or lower according to most lenders' guidelines.

By dividing the borrower's gross monthly income by their monthly gross debt obligations, the lender determines the DTI ratio. With a lower DTI ratio, a borrower has less debt overall and is more likely to be able to make loan payments. It's crucial to remember that different lenders may have additional DTI requirements, and some lenders may have more lenient DTI guidelines for particular loan programs like Conventional 97. It is, therefore, advised to check with your lender for the most recent DTI requirements and procedures.

FHA Loan Debt to Income Ratio

Less stringent credit score requirements apply to FHA loans. Although most lenders prefer to keep the debt ratio at 43% or less, the lender permits a maximum DTI of 57% for FHA loans. FHA loans are better for high-debt-to-income borrowers.

Loan Type

Conventional 97 loan type

A Fannie Mae Conventional 97 loan requires a fixed-rate mortgage. This means that the lender will not change the interest rate during the life of the loan, regardless of market conditions, providing the borrower with the security of knowing their mortgage payments for the entire loan term. It makes budgeting and planning for the future easier.

The loan term of a Fannie Mae Conventional 97 loan is 30 years, requiring full repayment within 30 years from the date of disbursement. During this period, the borrower will make fixed monthly payments, including principal and interest. At the end of the loan term, the borrower will fully repay the loan and own the property free and clear.

However, it's important to note that different lenders may have other loan terms and interest rate options; check with your lender for the most current fixed-rate mortgage guidelines and requirements.

FHA Loan Type

The FHA gives the borrower the option of fixed- or adjustable-rate financing. The loan term options for the borrower are 30 or 15 years.

Mortgage Insurance

A 3% down payment is required for conventional 97 loans, which are Fannie Mae-backed. However, if the down payment is less than 20%, borrowers must pay for private mortgage insurance (PMI). The cost of PMI varies depending on the borrower's credit score and can range from 0.46% for those with a credit score of 760 or higher to 1.5% for those with a credit score 620. There is no upfront fee unless the borrower chooses the split premium option.

FHA Mortgage Insurance

Like conventional 97 loans, FHA loans have multiple monthly mortgage premiums based on the term and down payment. However, one of the benefits of FHA financing is that the FHA does not adjust the mortgage insurance premium based on credit scores. Whether an applicant has a 620 credit score or a 780 credit score, the cost of the MI premium is always 0.55% of the loan amount. This makes FHA financing more beneficial for low-credit-score home buyers and refinancing homeowners. Additionally, borrowers must pay a lump-sum fee at settlement, although this upfront premium can be financed into the loan.

Income Limit

Conventional 97 Income Limit

The Fannie Mae-offered Conventional 97 loan program has no set income limit.

FHA Income Limit

There is no income limit with FHA loans.

Loan Limit

Conventional 97 Loan Limit

The Federal Housing Finance Agency (FHFA) has set the 2023 loan cap for a traditional 97 loan at $726,200 in most areas of the United States, while it could be higher in high-cost areas. The borrower must only pay down 3% of this kind of mortgage; the lender will cover the remaining 97%. The loan limit may vary based on where and what property is being purchased. The FHFA will set the maximum loan amount based on the debt-to-income ratio.

FHA Loan Limit

FHA loan limits represent the highest allowable insured amounts provided by the Federal Housing Administration (FHA) for various property types, such as single-family homes and duplexes, within distinct counties across each state. These limits are subject to annual adjustments and depend on local housing market conditions and property categories. They are closely tied to and influenced by the conforming loan limits established by Fannie Mae and Freddie Mac.
See county loan limits.


In conclusion, choosing between the Conventional 97 loan and an FHA loan requires careful evaluation of various factors. While the Conventional 97 loan offers a low down payment option with competitive interest rates and potential cost savings, FHA loans provide more flexibility in credit requirements and higher allowable debt-to-income ratios.

By considering your financial situation, down payment capabilities, credit history, and long-term homeownership goals, you can make an informed decision that aligns with your needs. Consulting with a mortgage professional can also provide valuable guidance and help you weigh the pros and cons of each loan program based on your specific circumstances.

Remember, what works for one borrower may not be the best option for another, so carefully assessing your priorities and financial situation is essential. With a thorough understanding of the differences between the Conventional 97 loan and FHA loan programs, you can confidently choose the option that sets you on the path to successful homeownership.

FHA - HUD Handbook 4000.1
97% Loan to Value Options
Fas: 97% TV Options