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FHA vs Conventional Loans
“What is the difference between an FHA loan versus a Conventional loan?”
“Which one is better?”
These are the two most commonly asked questions when comparing loan options. With an FHA mortgage, you must use an approved FHA lender to 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 plan to buy will fulfill these requirements.
FHA loans allow repairs to be added to the entire loan, known as a 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 a 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 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. A 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 lower with FHA than they are with a 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.
Difference between FHA and Conventional loans
The fundamental difference between FHA and Conventional-conforming loans are:
– FHA requires a middle FICO score of 580 to qualify; Conventional requires a 620 middle FICO.
– Borrowers can go as high as 57% debt-to-income ratio; Conventional can offer only up to 45% DTI.
– A down payment of 3.5% is required on all FHA loans; a Conventional loan requires a minimum of 5% down payment, recently revised to a 3% down payment.
– 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.
FHA loans carry mortgage insurance called MIP or Mortgage Insurance Premium. They are for the life of the loan and cannot be canceled. The only way to cancel the MIP is to either pay the loan off or refinance to a conventional-conforming loan. All conforming loans with a loan to value of 80% require mortgage insurance, called PMI or Private Mortgage Insurance. It serves the same purpose as FHA’s MIP but the main difference is, PMI may be cancelled when the balance reaches below 80% of the original value of the home at the time of purchase. It automatically cancels when it reaches 78% of the original purchase price.
For additional information regarding FHA vs. Conventional loans, contact us at 800-854-4142 or use any of the tools on this website.
FHA Loan Benefits and Advantages
Compared to conventional loans, FHA carries a lower interest rate. Since HUD insures the loan against future default, it is offered a lower rate.
Minimum requirement for an FHA loan is only 3.5% compared to 5% on conventional loans. The borrower can also get a “gift” from family members to be used as a down payment on the house.
Required minimum credit score for an FHA loan is lower compared to the conventional counterpart. TexasFHA.org will extend an FHA loan to borrowers with middle FICO scores as low as 580.
FHA loans can go as high as 57% debt-to-income (DTI) ratio with an automated underwriting system approval. Conventional loans can only go as high as 45% DTI. What does this mean? This allows the home buyer to purchase a higher sales price home. Lots of times, the higher DTI decides if a borrower qualifies for a home loan or not.
An FHA Loan Specialist Ready To Help You
Our FHA Loan Specialists are always available to help you and answer any questions. You may contact a dedicated FHA Loan Specialist through our website or by calling us directly. You may also chat with us to get a quick answer to your questions.
We make the FHA Loan Process Quick & Easy
Lenders often times will steer their clients away from an FHA loan due to their inexperience with the program. FHA Loans are a great source of funding for our clients. We share our knowledge and experience with FHA loans, making it easier for borrowers.
FHA Approved Lender
The Federal Housing Administration requires lenders offering FHA loans to go through an extensive approval process. We are FHA-approved and designated as a “Full Eagle” FHA mortgage lender offering FHA-insured home loans in Texas.
FHA Loans Help Make Home Ownership Possible For a Wider Range of People.
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Capital Home Mortgage Team
powered by Sun West Mortgage
Company, Inc. NMLS #3277
6131 Orangethorpe Avenue, Ste 500
Buena Park, CA 90620