What to choose, conventional vs FHA home loans?
FHA loans are insured by the Federal Housing Administration, while the federal agency does not insure conventional mortgages. Both types of loans benefit any buyer, but the qualification requirements vary.
Below, we will look at the factors that need to be considered when comparing FHA loan vs conventional loan.
Some words about FHA and conventional loans
Discussing FHA versus conventional mortgage starts with analyzing your down payment funds and credit score. These two loans are very different regarding minimum requirements in this sphere.
Minimal down payment
FHA loans have a minimum down payment of 3.5% for debtors with a credit score of 580 or higher. Some conventional mortgages allow a minimum down fee of 3%, but this is for borrowers with a credit score above 600 and a stable financial position.
Credit scores
FHA loans have a minimum down payment of 3.5% for a homebuyer with credit scores of at least 580. If the client's credit score is from 500 to 579, he may qualify for an FHA loan with a 10% down payment.
Conventional loans require a credit score of over 620. No matter what you choose, FHA vs conventional loan, the rating for obtaining a mortgage loan will depend on the lender. Although the FHA sets minimum scores, lenders may require a higher minimum. And with both conventional vs FHA, you will be offered a better interest rate with a higher credit score.
Debt to income ratio
Your debt-to-income ratio, or abbreviated DTI, is the percentage of your monthly pre-tax income that you spend on paying off debts, including mortgages, auto loans, child support, and minimum credit card payments. The higher your DTI, the more chances you will not pay your bills.
To pretend for an FHA loan, your debt-to-income ratio must be less than 50%. Conventional loans also allow debt-to-income ratios of up to 50%. Although lenders sometimes tolerate such a high debt-to-income ratio, approval is more likely for mortgage borrowers with a DTI of 43% or more minor.
Mortgage insurance
Mortgage insurance saves the lender if the borrower defaults. Conventional loans demand borrowers to pay for mortgage insurance if their down payment is less than 20%. FHA loans require mortgage insurance for any down payment. Compare FHA to conventional mortgage:
- FHA mortgage insurance premiums cost the same regardless of your credit score. Private mortgage insurance for regular loans is more expensive if you have a low credit score but can be cheaper than FHA mortgage insurance if your credit score is over 720.
- FHA mortgage insurance premiums continue for the loan period if you make less than 10% down payment. If the size of a down payment is over 10% on an FHA loan, you will pay FHA mortgage insurance for 11 years.
- You can only escape FHA mortgage insurance by refinancing into a conventional loan. Private mortgage insurance is automatically canceled for conventional loans once your equity reaches 22% of the purchase price.
Both the FHA and the cost of private mortgage insurance vary depending on the down payment size.
Property standards
The condition of the property and the intended use are important factors when we compare conventional loan vs first time home buyer.
FHA grades are more stringent than regular grades. Not only is the value of the property appraised, but the safety, structural integrity, and compliance with local regulations are carefully checked. When you receive an FHA loan, you must live in the home as your primary home. Investment properties and resold homes (sold within 90 days of the previous sale) are not eligible for FHA loans.
You can get a conventional loan to buy a holiday home or investment property and a primary residence.
Refinancing
If we analyze FHA vs conventional in terms of refinancing, the advantage of the FHA is that it «streamlines» refinancing. It's about as easy with no credit checkup, no proof of income, and probably no home appraisal. But there are strict requirements to make FHA refinancing easier.
There's additional reason to refinance an FHA loan: to get rid of monthly mortgage insurance payments. FHA mortgage insurance cannot be canceled if you have paid less than a 10% down payment. To get rid of monthly FHA premiums after accumulating 20% equity, you must refinance into a conventional mortgage.
Conclusions
There is a considerable difference between FHA and conventional mortgages.
Conventional loans:
- Require higher credit scores.
- Provide for lower upfront payments.
- Have more liberal property standards.
- Provides private mortgage insurance when the down payment is less than 20%, and the insurance can be cancelled.
FHA loans:
- Suitable for borrowers with lower credit scores.
- Ask for a slightly larger down payment.
- Have more explicit standards of ownership.
- Make FHA mortgage insurance obligatory regardless of the down payment, and it can't be canceled unless you refinance it into a conventional loan.
If you think about the question: should I get FHA or conventional loan, you can consult with a mortgage loan officer.
Another critical point: if you are in the military or are a veteran, a VA-secured loan may be the way to go. VA loans usually do not require a down payment. And if you live in the suburbs or the villages, a USDA loan might also be a good option.
