In short, FHA loans are backed by the federal government while conventional mortgages are not. FHA loans are designed to help low-income home buyers with lower credit scores, while conventional loans are available for borrowers with higher incomes and higher credit scores. Each loan has their own set of pros and cons, but the requirements to qualify for each loan differs greatly.
Choosing FHA loan or Conventional Loan
FHA loans and conventional loans are two of the most common home loan programs used today. The two biggest differences when it comes to choosing between the two are the down payment and the credit score. Though your debt-to-income ratio as well as other various factors also play a role.
Although they have stricter guidelines, a conventional loan will typically save a borrower more money over the duration of their loan.
The minimum down payment required for an FHA loan is 3.5%. There are some conventional mortgages that will allow a down payment as low as 3%, but they are often designated for borrowers with a high amount of savings.
FHA loans are significantly easier to qualify for, with a minimum credit score requirement of 580 to be eligible for a 3.5% down payment. Those with a lower score might qualify for an FHA loan with a 10% down payment.
When it comes to conventional mortgages, most lenders prefer a credit score over 700, though many lenders will accept credit scores around 640. In general, the higher your credit score the lower your interest rate will be.
Your debt-to-income ration is the percentage of a consumer’s monthly gross income to is allocated toward paying down debts. These debts can include credit card payments, student loans, and car loans. The higher a borrower’s DTI, the more likely they are to struggle to make mortgage payments.
To qualify for an FHA loan, a borrower’s DTI must be 50% or less. As far as conventional mortgages go, lenders prefer to see DTIs around 43% or less, though some will provide conventional loans for those with higher DTIs.
Mortgage insurance helps protect the lender in case the borrower defaults on their loan. There are two main types of mortgage insurance; Private Mortgage Insurance and Mortgage Insurance Premiums (PMI).
With a conventional loan, borrowers are required to pay for mortgage insurance if their down payment is less than 20%. With an FHA loan, mortgage insurance is required regardless of the amount of money put down.
With a conventional loan, private mortgage insurance can be canceled when the borrower’s equity reaches 78% of the home’s purchase price. With an FHA loan, mortgage insurance can be eliminated by refinancing to a conventional loan.
Before you Decide
When deciding on the right loan product for you, it’s always best to consult with a mortgage loan professional. They will be able to analyze your situation an help find the right loan for your specific needs.