Conventional differential item functioning (DIF) detection methods (e.g., the Mantel–Haenszel test) can be used to detect DIF only across observed groups, such as gender or ethnicity. However, research has found that DIF is not typically fully explained by an observed variable. True sources of DIF may include unobserved, latent variables, such as personality or response patterns. The factor mixture model (FMM) is designed to detect unobserved sources of heterogeneity in factor models. The current study investigated use of the FMM for detecting between-class latent DIF and class-specific observed DIF. Factors that were manipulated included the DIF effect size and the latent class probabilities. The performance of model fit indices (Akaike information criterion [AIC], Bayesian information criterion [BIC], sample size–adjusted BIC, and consistent AIC) were assessed for their detection of the correct DIF model. The recovery of DIF parameters was also assessed. Results indicated that use of FMMs with binary outcomes performed well in terms of the DIF detection and for recovery of large DIF effects. When class probabilities were unequal with small DIF effects, performance decreased for fit indices, power, and the recovery of DIF effects compared with equal class probability conditions. Inflated Type I errors were found for non-DIF items across simulation conditions. Results and future research directions for applied and methodological are discussed.