Atlanta, Georgia, is a great place to buy your first home. The local economy is growing, the cost of living is very affordable, and the housing market is favorable. As a first-time homebuyer, one of the most critical questions you must answer is what type of home loan you can afford. 

For most first-time borrowers, the choice comes down to two specific loan programs: FHA and conventional. Understanding the differences when comparing FHA vs conventional loans is crucial to choosing the right path. 

Atlanta’s Real Estate Market for First-Time Buyers

First, let’s discuss the market in Atlanta, Georgia. As of September 2024, the median sale price of a home in this city was $392,000. While this may seem expensive, it has dropped 5.4% in the past year, and the average home sells for 2% lower than the initial listing price. Redfin, one of the largest real estate firms in the country, considers the market somewhat competitive [1]. 

Your ability to enter this market as a first-time buyer depends on your chosen loan product. A conventional loan may have a more favorable outlook in the long term, but an FHA loan makes homeownership more accessible. 

What Are Conventional Loans?

A conventional loan is the most popular mortgage product in the residential real estate sector. Firms like Fannie Mae and Freddie Mac, overseen by the Federal Housing Finance Agency, often consider these mortgages safe enough to purchase in the secondary mortgage market if the amount falls within the loan limits. A government agency does not back conventional loans. 

You must meet several requirements to acquire a conventional loan for your Atlanta home. First, you typically need a minimum credit score of 620 or greater. The credit score requirements could be higher depending on the lender you choose.

 The minimum down payment for a conventional loan is usually 3%, though most lenders will recommend saving for a 20% down payment. A conventional loan is highly advantageous if you are financially prepared since you can build equity and avoid high mortgage insurance premiums. Due to loan limits, you also have greater spending power with a conventional loan. 

What Are FHA Loans?

FHA loans are meant for borrowers with lower credit scores or limited income. Buying a house is an excellent investment focusing on the future, so a government entity provides backing for FHA loans to make homeownership accessible for more Americans. 

The Federal Housing Administration (FHA) insures these mortgages so lenders can offer more flexible terms to borrowers. 

Typically, a lower credit score requirement of 580 is enough to qualify for an FHA loan. The minimum down payment amount is usually 3.5%, but this depends on which FHA-approved lenders you are considering. An FHA loan is a more flexible option for first-time homebuyers in Atlanta with limited credit scores or income. 

Credit Score and Down Payment Requirements: Conventional vs. FHA

The main reasons people choose between FHA and conventional loans are the differences in credit score and down payment requirements. If you have a lower credit score, you may not qualify for conventional loans because most lenders require 620 or higher. 

FHA lenders often allow those with scores of 580 to still apply for FHA loans. Some lenders may even allow lower scores if other financial components are in order. 

The recommended down payment for conventional loans is 20% of the home’s sale price. Most borrowers will shoot for at least 10% to minimize the loan's long-term costs. Technically, the minimum requirement for a conventional loan down payment is 3%. 

However, conventional borrowers usually pay more. For an FHA loan, the minimum requirement is 3.5%. Down payment plays a crucial role in your monthly costs because of mortgage insurance. 

Another element when applying for a home loan is your debt-to-income ratio. If your DTI ratio is too high, lenders will consider it a risk to lend you money. Most conventional loans require a DTI ratio of 43% or less, while FHA loans require 50% or less. 

Mortgage Insurance: Conventional vs. FHA

Borrowers aim for 20% down payments on conventional loans to avoid paying mortgage insurance premiums. Mortgage insurance provides extra protection for lenders who lend to riskier borrowers. Even if you do pay mortgage insurance on a conventional mortgage, you can have these premiums waived once you have reached a certain amount of equity.

Since an FHA loan has looser qualifying standards, lenders compensate for the increased risk by making the borrower pay mortgage insurance premiums. FHA mortgage insurance is mandatory for the life of the loan. 

Interest Rates and Loan Costs

Assessing the total cost of a mortgage loan is an essential step when buying your first home. Conventional loans cost more upfront when you buy the house, but the long-term finances are more favorable. 

On the other hand, FHA loans offer lower barriers to entry, but the ongoing costs of the loan must be evaluated. There is also a cap on the cost of this mortgage product because of the FHA loan limit. 

Much of the difference comes from the interest rate for FHA and conventional loans. If you have a higher credit score, qualifying you for conventional mortgages, you will have access to lower conventional loan interest rates. 

These will lower the total loan amount. FHA loan interest rates tend to be higher since borrowers have lower credit scores. The lower the interest rate on your loan, the less you will pay over the life of the loan. 

Affordability in Atlanta: Conventional vs. FHA

Atlanta has relatively affordable homes, especially compared to other major cities in the U.S. However, affordability depends on the type of loan you get and your finances. With the median home selling for almost $400,000, most borrowers need a mortgage to access homeownership. Property taxes can also be high in the city, so your monthly budget should account for that.

Your monthly cost will be lower if you qualify for conventional loans and commit a reasonable down payment. This results from a lower total loan amount and a more competitive interest rate. 

However, conventional loans also allow you to buy more expensive houses, so your monthly costs will be higher if you purchase a larger home. A loan backed by the Federal Housing Administration will decrease the upfront costs, but with mortgage insurance and a smaller down payment, your monthly expenses may be harder to manage. 

Which Loan Is Best for Atlanta First-Time Buyers?

Monthly mortgage payments on your home are a better investment than paying rent. Over time, you build equity in the house, which benefits you financially if you know how to leverage it. However, you must choose the right mortgage product for the monthly payment to be affordable. 

Borrowers with steady incomes, higher credit scores, and reliable savings should pursue conventional home loans to lower the overall cost of the loan. If you have a shorter credit history that prevents your score from qualifying you for those loans or if your income is limited, an FHA loan is a better option.

How to Get Pre-Approved for a Conventional or FHA Loan

Pre-approval is necessary if you choose between FHA and conventional loans in a competitive market like Atlanta. Pre-approval on a loan lets you make home offers, knowing you can process the mortgage quickly once the offer is accepted. This will give you an edge over other borrowers in the Atlanta market since you can appease sellers faster. 

To get pre-approved, you must choose a lender and apply for pre-qualification. You will complete an online application and submit it with the necessary documentation, such as IDs, bank statements, pay stubs, and other financial information. 

If the lender accepts your application, you are pre-approved for that specific loan amount. You can increase your chances of approval by building up your credit score, saving for a down payment, providing all required information, and being responsive to the lender. 

Making the Right Choice for Your First Home in Atlanta

FHA loans are ideal for borrowers with lower credit scores, less income, and fewer cash assets. Even with limited means, an FHA loan gives you a better chance of purchasing your first home in Atlanta. 

A conventional mortgage requires a better credit score, higher income, and more savings to afford the upfront costs. However, the long-term cost of the loan is typically reduced, especially since private mortgage insurance can be waived. An FHA loan costs less to acquire, but it will require mortgage insurance for the life of the loan.

Choosing the right loan depends on your financial situation. If you are financially stable, then a conforming conventional loan is preferable. If you have a short credit history or a higher DTI ratio, your only option may be certain FHA loans. As you navigate the home-buying process for the first time, consider consulting a mortgage professional.

Resources: [1] Redfin