So you’re interested in getting a mortgage but want to find out which loan is better.
FHA loans or Conventional loans?
These loan programs are very different. Choosing the right mortgage programs is critical to make sure you get the best deal on your loan.
In this article we compare FHA and Conventional loans and answer your questions. By the end of this article you will be able to decide which loan type is best for you.
FHA vs Conventional Loan Comparison Chart
There are a couple of questions you need to answer when determining which loan is better for you.
If at least 3 of these statements apply to you then you may be a candidate for a conventional loan.
- Have a 640 Credit score or higher
- Large down payment (5%-20%+)
- Plan on putting down 20% to avoid PMI
- Good income (High DTI ratio)
- Purchasing a higher priced home (Over $271,050 in most areas)
The truth is..
Conventional loans are great for some people and if you have the option of a conventional or FHA loan. The conventional loan will be more expense up-front, but cheaper option in the long run.
If you are someone who is planning on using a 20% down payment to avoid PMI. You have no choice to go conventional, because FHA loans will require mortgage insurance regardless how much your down payment is.
The FHA loan limits are $271,050 in about 65% of the country. There are certain high cost areas, like Los Angeles or New York that the FHA loan limit increases up to $625,000.
If you are buying a home that exceeds the FHA loan limit in your area, you will need a conventional mortgage.
Conventional Mortgage Benefits
- Higher loan amounts (up to $424,100)
- No up-front private mortgage insurance (PMI).
- Flexible guidelines on the homes condition
- PMI payments cancel when the LTV reaches 78%
- NO PMI with a downpayment of 20%
- Mortgage insurance is less expensive (0.51% vs 0.85% with FHA)
- 3% downpayment for conventional 97% LTV loan
Conventional Mortgage Disadvantages
- Reserve funds are often required
- 620 credit score requirement (higher than FHA)
- Large downpayment 5%-20% (Unless you qualify for a Conventional 97 loan which requires a 3% down payment)
- Higher interest rates
- More difficult to qualify for than FHA
When FHA Loans are better than conventional
An FHA loan is a Government backed home loan program that makes buying a home easier for Americans. The great thing about these loans, is that they’re easier to qualify for. Not everyone has great credit and a large down payment, and with an FHA loan you don’t need to. For people who have low credit scores or funds for a down payment, FHA loans are a great option.
If you have a 500-579 credit score you can qualify for an FHA mortgage with a 10% down payment. Although if you have a credit score in this range it is very difficult to close on a home loan. You should work on increasing your credit scores before applying for a mortgage.
If you have a 580 credit score it is much less difficult to qualify for FHA. You will also need a low down payment of just 3.5%. While conventional loans are cheaper than FHA in the long run, FHA is cheaper up-front because they require a low down payment.
FHA Loan Benefits
- Low downpayment requirement of 3.5%
- The downpayment and closing costs can be given as a gift.
- Easier to get approved for than conventional loans.
- Lower credit scores accepted (580 credit score and higher)
- Lower mortgage interest rates than conventional loans.
- Reserve funds not required.
FHA Loan Disadvantages
- Lower maximum loan limits
- MIP required for the life of the loan if a borrower puts down less than 10%
- Mortgage insurance required even if putting 20% down
- Can only purchase condos that are FHA approved.
- Mortgage insurance monthly cost is higher
Minimum Credit Score requirements for 2017
Conventional Loan Credit Requirements
Having a good credit score is essential to getting a conventional loan. You can expect lenders to require scores anywhere from 620 to over 700. The typical minimum credit score lenders require for conventional mortgages is 620-640.
FHA Loan Credit Requirements
FHA is known for their relaxed credit score requirements, an FHA mortgage requires 500 credit score with 10% down.
If you have a 580 credit score you can get an FHA loan with a small downpayment of just 3.5%.
Down Payment Requirements
FHA Down Payment Requirements
FHA home loans have a major advantage for people who don’t have the money to make a large down payment. A 3.5% downpayment is needed if you have a minimum credit score of 580. If you have a credit score of less than 580, you may qualify by paying a larger downpayment of 10 percent.
- Credit score 500-579 = 10% down payment
- Credit score 580+ = 3.5% down payment
Conventional Down Payment Requirements
A conventional loan will have a down payment of 5% – 20% depending on the lender, loan type, and credit score of the borrower.
However, there is a conventional 97 loan program that requires just a 3% down payment. This is even lower than FHA loans require.
FHA vs Conventional Mortgage Insurance Fees
Unfortunately, FHA loans require mortgage insurance even if you have a 20% down payment. So if you want to avoid PMI you will need to get a conventional mortgage.
If a borrower puts less than 10% as a down payment then they will pay PMI for the life of the loan. If a down payment of at least 10% or more is put down, then PMI cancels when the balance reaches 78% LTV.
Differences in Mortgage Insurance Fees
- FHA <90% LTV = 0.80% MIP
- FHA >90% LTV = 0.85% MIP
- Conventional loan = 0.51% PMI
How Much Can You Borrow
Conventional loans have a loan limit of $424,100 in most areas of the U.S.
FHA Loan limits are much lower with the limit in most of the U.S. is $271,050.
Your debt-to-income ratio is a major determining factor in how much you can borrow. This calculation is the percentage of your monthly income minus monthly obligations. The FHA is much more lenient on maximum debt-to-income ratios. The typical max DTI is:
- FHA – Maximum DTI 45% (Can be as high as 50% in some cases)
- Conventional – Maximum DTI 43% (hard DTI cap)
Conventional Mortgages are cheaper
The upfront costs associated with obtaining an FHA loan is lower with a conventional loan because of the low down payment. However, because PMI is lower on conventional loans and it cancels once the LTV reaches 78%. While FHA Loans are cheaper in the beginning, over the life of the loan conventional loans are the cheapest option.
In general, it takes longer to process FHA mortgages. FHA financing requires more time to process due to more bureacracy, and because the property needs to be inspected by a licensed FHA certified appraiser. An appraiser will do a standard appraisal for conventional loans. More problems are found and are required to be repaired before the loan process can move forward with FHA loans.
Are you interested in learning more about the differences between conventional loans vs. FHA loans. To find out what kinds of loans you might qualify for, simply fill out our convenient form. Lenders from our network will give you a free, no-hassle consultation sso you can compare Home Loan Offers.