FHA Loans vs. Conventional Loans
“What is the difference between an FHA loan vs a Conventional loan?” “Which one is better?” Typically, the two most commonly asked questions when comparing loan options. With an FHA mortgage you must use an approved FHA lenderto participate in an FHA loan program. When you apply for a conventional mortgage you can approach any lender and use comparison sites to find the best deals. However, the credit requirements for an FHA mortgage are far less strict than the requirements for a conventional mortgage.
With FHA mortgage loans you have to understand that the FHA may require inspection of the property that you intend to buy. It must meet their standards of safety and state of repair. An approved FHA appraiser will make sure the home you intend to buy will meet these requirements.
FHA loans allow repairs to be added to the entire loan, known as 203k loan. Down payments are lower with FHA mortgage loans but if you cannot afford the down payment on a new home, you are allowed to use money received as a gift. As a first time buyer you might qualify for a grant from a local government agency or you could get a loan from an approved local program. FHA loans require 3.5% down payment. For a long time, the minimum down payment required for a conventional mortgage is 5%. You can use gift funds as long as you have 5% of your own money as a down payment. Conventional loans can use all gift funds if the down payment is at least 20% or more. However, as of December 19, 2014, Fannie Mae came up with a revised guideline for conventional loans. They only require a minimum of 3% down payment effective immediately.
FHA mortgage loan requires Mortgage Insurance Premium (MIP) which is for the life of the loan. Conventional loan, on the other hand, requires Private Mortgage Insurance (PMI). This is calculated based on several factors: credit score, down payment, debt-to-income, etc. Closing Costs are generally lower with FHA than they are with conventional mortgage. Strict terms apply to FHA mortgage loans, restricting the type of charges a lender can add and charge to a borrower’s FHA closing costs.
The basic difference between FHA and Conventional-conforming loans are:
- Credit – FHA requires a middle FICO score of 580 to qualify; Conventional requires a 620 middle FICO;
- Income – Borrowers can go as high as 57% debt-to-income ratio; Conventional can only up to 45% dti;
- Asset – A down payment of 3.5% is required on all FHA loans; Conventional loan requires a minimum of 5% down payment, recently revised to 3% down payment;
- Seller’s Contribution – FHA allows up to 6% Seller’s contribution towards the buyer’s closing costs and prepaid items; Conventional loans only allow a maximum of 3% seller’s contribution.
For additional information regarding FHA vs Conventional loans, contact us at 281-860-2533 or use any of the tools in this website.