Buying a home is often the largest investment that a person makes, and the majority of people seek a mortgage to fund the purchase. The type of loan you obtain determines your terms, interest rate, qualifying criteria, and, ultimately, the type of property you can buy. Conventional loans and FHA (Federal Housing Administration) loans are the two most sought-after options for first-time homeowners, each with their own set of advantages and disadvantages. Here are the main differences between the two financing options: FHA vs. conventional loans.
FHA Vs. Conventional Loan
FHA loans and conventional loans have different standards that borrowers must satisfy in order to qualify. Here are some major differences between the two:
Your credit score dictates the type of home loan you are qualified for. If your FICO score is between 500 and 620, the FHA loan is your best option. However, if your credit score is higher than 620, you should choose a conventional loan with a 3% down payment. This is because your mortgage rate and PMI (Purchasing Managers’ Index) charges decrease as your credit score improves.
FHA loans are perfect for first-time homeowners who cannot afford a large down payment. Buyers who use FHA loans can put down payments as low as 3.5%. Conventional loans once required a 20% down payment. Some lenders, however, now offer conventional loans with as little as a 3% down payment.
You can only borrow a certain amount of money with both conventional and FHA loans. For this year, the FHA loan limit for a one-family house is $472,030, while the conventional loan limit is $726,200.
Although some borrowers do approve those with a DTI ratio higher than 50%, you’re more likely to be approved for an FHA loan if it’s 50% or less. For conventional mortgages, lending companies require borrowers to have DTIs of 36% or less, while some lenders accept DTIs up to 50%, but not above.
Conventional loans often have fixed or flexible interest rates, with the option to refinance later if you meet certain requirements. A higher credit score means a lower interest rate. FHA loans, on the other hand, often offer attractive rates to borrowers due to the lesser risk to the lender.
Mortgage insurance is mandatory for all FHA loans and is valid for the entire term of the loan. After paying 20% of your loan, you could decide to refinance into a conventional loan to avoid MIPs (Mortgage Insurance Premium). However, conventional loans require mortgage insurance only when the down payment is less than 20%.
Property evaluations for FHA loans are quite similar to those for conventional loans. Appraisers evaluate a house’s worth, structural soundness, and safety. FHA appraisers must ensure that it complies with the FHA Minimum Property Standards. The Home Valuation Code of Conduct governs appraisal standards for conventional loans, safeguarding appraisers from lender and realtor interference.
For FHA loans, the borrower must use the property as their main residence, so they cannot invest in or flip homes. But you can utilize conventional loans to purchase different property types, like investment properties, private homes, and vacation homes.
If you need help choosing the best financing for your dream home, contact us today!