FHA vs Conventional Loans Texas Buyers Need to Know

Quick Answer: FHA loans require just 3.5% down and 580 credit score but include mortgage insurance. Conventional loans need 3-20% down with 620+ credit but offer more flexibility and lower long-term costs for qualified Texas buyers.

Choosing between an FHA and conventional loan can save or cost Texas home buyers thousands of dollars. In my 28 years as a licensed Texas REALTOR and Broker/Owner of Purtle Realty Group, I’ve helped over 100 families navigate this critical decision across Dallas-Fort Worth.

The loan type you choose impacts everything from your down payment to monthly costs and home selection options. Understanding these differences is especially important in competitive DFW markets like Plano, Frisco, and Southlake where pricing and inventory vary significantly.

What Are the Key Differences Between FHA and Conventional Loans in Texas?

FHA loans are government-backed mortgages insured by the Federal Housing Administration, while conventional loans are issued by private lenders without government backing. This fundamental difference creates distinct advantages and limitations for Texas home buyers.

FHA Loan Requirements:

• Minimum 3.5% down payment
• Credit score as low as 580
• Debt-to-income ratio up to 57%
• Mandatory mortgage insurance premium (MIP)
• Property must meet FHA standards

Conventional Loan Requirements:

• Down payment from 3% to 20%
• Minimum 620 credit score (typically)
• Debt-to-income ratio usually maxed at 50%
• Private mortgage insurance (PMI) if down payment under 20%
• More flexible property standards

In competitive neighborhoods like Legacy West in Plano or Southlake Town Square, conventional loans often perform better in multiple offer situations since sellers perceive them as more reliable.

How Much Down Payment Do You Need for Each Loan Type in DFW?

Down payment requirements significantly impact your home buying budget in the Dallas-Fort Worth market. FHA loans consistently require 3.5% down regardless of your credit score, making them accessible for first-time buyers in areas served by Plano ISD or Frisco ISD.

After helping 100+ families purchase homes, I’ve seen how down payment differences play out practically. On a $400,000 home in Richardson near the DART Red Line, an FHA buyer needs $14,000 down while a conventional buyer might put down anywhere from $12,000 to $80,000.

Conventional loans offer more flexibility with down payment amounts. You can put down as little as 3% with certain programs, but higher down payments reduce monthly costs and eliminate mortgage insurance at 20%. This flexibility proves valuable when competing for homes near popular areas like Knox-Henderson or Bishop Arts District.

When Should Texas Home Buyers Choose FHA vs Conventional Loans?

Choose FHA loans when:

• Your credit score falls between 580-640
• You have limited savings for down payment
• Your debt-to-income ratio exceeds conventional limits
• You’re buying in established neighborhoods with older homes

Choose conventional loans when:

• Your credit score exceeds 740
• You can afford 10-20% down payment
• You’re buying above FHA lending limits ($498,257 in DFW for 2024)
• You’re purchasing in luxury markets like Highland Park or Westlake

In my experience, FHA loans work exceptionally well for buyers targeting homes in Garland, Grand Prairie, or Irving where property values align with FHA limits. However, buyers looking at homes near Legacy Hall or American Airlines Center often exceed FHA limits and need conventional financing.

The competitive nature of DFW’s market also influences loan choice. Conventional offers typically receive preference when multiple offers compete, especially in hot markets served by Carroll ISD or Highland Park ISD.

What Are the Long-Term Cost Differences Between These Loan Types?

Understanding long-term costs helps Texas buyers make informed decisions beyond just qualifying requirements. FHA loans include both upfront and annual mortgage insurance premiums that significantly impact total housing costs over time.

FHA mortgage insurance costs 1.75% upfront plus 0.55-1.05% annually based on loan amount and down payment. On a $350,000 FHA loan, you’ll pay approximately $6,125 upfront and $3,200 annually in mortgage insurance that cannot be removed without refinancing.

Conventional loans with less than 20% down include PMI ranging from 0.25% to 2% annually, but this insurance automatically cancels when you reach 20% equity. For buyers planning to stay long-term in areas like Allen or McKinney, this difference becomes substantial.

Interest rates also vary between loan types. FHA rates typically run 0.125% to 0.25% lower than conventional rates, but the mortgage insurance often negates this advantage over time.

How Do Credit Scores Impact Your Loan Options in Texas?

Credit scores dramatically affect both loan eligibility and pricing in the Dallas-Fort Worth market. FHA loans accept scores as low as 580, making homeownership possible for buyers rebuilding credit who want to live near DNT Toll Road corridor or DART stations.

However, conventional loans reward higher credit scores with better pricing. A buyer with 760+ credit score might secure rates 0.5% lower than someone at 680, translating to significant monthly savings on homes near Klyde Warren Park or Deep Ellum.

In my 28 years of experience, I’ve seen credit score differences change buyers’ purchasing power by $50,000-$100,000 in competitive markets. That’s often the difference between affording a home in Frisco ISD versus having to look at alternatives.

Most lenders offer conventional loans starting at 620 credit score, but the best pricing typically requires 740+. If your score falls between 620-740, comparing both loan types often reveals surprising results.

Ready to determine which loan type fits your Texas home buying goals? Call or text Kristy at (972) 345-3516 for a free consultation and connect with trusted DFW lenders who understand local market conditions.

Frequently Asked Questions

Q: Can I use FHA loans to buy investment properties in Dallas-Fort Worth? A: No, FHA loans are strictly for primary residences. You must live in the property for at least one year after closing.

Q: What happens if the home I want exceeds FHA lending limits in Texas? A: You’ll need conventional financing or look at conforming loan limits. In DFW, the 2024 FHA limit is $498,257 for single-family homes.

Q: How long does mortgage insurance last on each loan type? A: FHA mortgage insurance typically lasts the life of the loan. Conventional PMI automatically cancels when you reach 20% equity.

Q: Which loan type closes faster in competitive DFW markets? A: Conventional loans often close 2-3 days faster and face fewer appraisal issues, giving them advantage in multiple offer situations.

Q: Can I switch from FHA to conventional after buying my home? A: Yes, through refinancing once you build sufficient equity and meet conventional loan requirements, potentially eliminating mortgage insurance.