FHA vs Conventional Home Loans
Comparing FHA and Conventional Loans: Be Sure You’re Getting the Best DealWith credit scores and average household incomes falling across the nation, many families watched their dreams of home ownership slip away along with lenders’ trust in the average citizen. The Federal Housing Administration had found renewed strength through this dilemma, providing more than 300 percent more loans than in years before this crisis arose. Since this mortgage loan entity held borrowers to less strict standards than other portals, they were the only hope many potential homeowners had. However, experts currently find loan applicants may have better results by comparing FHA vs. Conventional Loans before purchasing a home.
• Credit Score ConsiderationsConventional loans tend to require higher credit scores, whereas the FHA caters to the opposite end of the spectrum. They offer consideration to those with scores as low as the 500 range but prefer applicants to hold a score of 640 or better. Another primary difference between FHA and conventional loans in this area is the FHA looks at the factors leading to a low score as opposed to just the number. A compensating factor must be present for a borrower with credit scores in the 500’s to get an FHA loan. It is unlikely that a borrower with a middle FICO score in the 500’s to get approved for a conventional loan.
• Income GuidelinesFor any mortgage loan, you must be able to present proof of adequate income and steady employment. The actual income requirement varies based on some factors, such as the size of the loan you need. All lenders set forth a certain debt-to-income ratio for their borrowers as well, meaning how much of your income is currently tied up in other responsibilities. For conventional loans, you often have to have a ratio of 35 to 45 percent to qualify, but the ratio for FHA loans may be as high as 50 – 55 percent.
• Down PaymentMany traditional lenders expect a down payment of 20 percent or more while the FHA’s conforming loans go as low as 3.5 percent. At a minimum, conventional loans require a 5% down payment. This money has to come from your earned resources. On the other hand, the FHA allows you to use gifts from others to generate your down payment. Those who haven’t been able to save enough money for their down payments have much more flexibility in this respect. Borrowers with a middle FICO score of less than 580 will be required to come up with 10% down payment to qualify for an FHA loan.
• Mortgage InsuranceThough there are numerous advantages of an FHA loan, this category is said to be the most significant disadvantage. Home buyers may find themselves paying more than $17,000 during the first five years of their mortgage for mortgage insurance alone with an FHA loan as opposed to $5,000 or less during the same time span with a conventional loan. Traditional lenders also tend to allow borrowers to stop making private mortgage insurance payments once they’ve paid 22 percent or more of the value of their homes. The FHA requires these payments to continue for the entire term of the loan. The only way to eliminate Mortgage Insurance Premium (MIP) on an FHA loan is to refinance it with a conventional loan.
The FHA has become famous for opening doors other lenders choose to slam in the faces of prospective buyers. Experts state this is still the best choice for low-to-moderate income families who don’t qualify for conventional loans. Still, thoroughly comparing FHA and Conventional mortgage loans is a good idea for those who may have other options.
To learn more about FHA loans and how it differs from a conventional mortgage, contact our Home Loan Specialist or use the tools on this website.