FHA vs Conventional Mortgage Loan
Compare FHA vs Conventional mortgage loans…
If you considering mortgage options for purchasing a home, you should be looking for the best deal possible. Choosing the right mortgage for you often involves a number of factors. When comparing an FHA vs. Conventional loan program, take a look at the qualification guidelines as well as the long term cost of the loan.
Let’s take a look at the differences that can help you decide between an FHA vs. Conventional mortgage loan:
FHA vs Conventional - Down Payment
Conventional loans and FHA loans both have great low down payment options that are under the traditional 20% down payment. If you are a buying your first home, your down payment options are a little more flexible with a conventional loan program.
3.5% minimum down payment - FHA Loan
3% minimum down payment - Conventional Loan for First Time Home Buyers
5% minimum down payment - Conventional Loan (second home purchase or after)
FHA vs Conventional - Minimum Credit Score
FHA loans can offer an advantage to potential home buyers with a more flexible minimum credit score requirement. We recommend taking to time to build your credit score above 740 to get the best pricing on your interest rate. However, these are the minimum scores needed to qualify for a conventional or FHA mortgage loan:
FHA Loan - 580 minimum credit score
Conventional Loan - 620 minimum credit score
FHA vs Conventional - Debt to Income Ratio
The primary way that lenders calculate how much home you can afford is by comparing your income to your potential debt payments. Often referred to as your “DTI” this debt to income ratio maximum is different for FHA and conventional loans.
Conventional mortgage - 45% debt to income ratio
In order to qualify for a conventional mortgage loan the maximum debt to income ratio is 45%. This means that no more than 45% of your gross monthly income can be dedicated to making debt payments, including your potential mortgage payment.
FHA Loan - 50% debt to income ratio
An FHA mortgage loan offers more flexibility in allowing a 50% debt to income ratio. This maximum DTI setting means that your monthly debt payments cannot exceed 50% of your gross monthly income. Which can be a slight advantage to consider for college graduates with monthly student loan debt payments when choosing between an FHA vs Conventional mortgage.
FHA vs Conventional - Negative Credit Reports
Having a good credit score is essential to qualifying for a mortgage loan. However, if you are building your credit back after a negative credit event, there is a waiting period required before you can be approved for a mortgage. When comparing an FHA vs. Conventional mortgage after negative credit events like a bankruptcy, foreclosure, or short sale it’s important to know the minimum waiting periods.
2 years since Bankruptcy - minimum waiting period to qualify for an FHA Loan
3 years since Foreclosure - minimum waiting period to qualify for an FHA Loan
3 years since Short Sale - minimum waiting period to qualify for an FHA Loan
4 years since Bankruptcy - minimum waiting period to qualify for a Conventional Mortgage
7 years since Foreclosure - minimum waiting period to qualify for a Conventional Mortgage
4 years since Short Sale - minimum waiting period to qualify for a Conventional Mortgage
FHA vs Conventional - Mortgage Insurance
Mortgage insurance is required for both FHA and Conventional mortgages with a down payment that is less than 20% of the home’s value. Although, the mortgage insurance is paid a little differently for each loan type.
Conventional mortgages require PMI, or private mortgage insurance, for loans with less than an 80% loan to value ratio. Once you hold at least 20% of the value of your home as equity, the bank servicing your conventional loan will drop the PMI from your monthly payments.
FHA loans have MIP, or mortgage insurance payments, built into the loan. These insurance payments can often cost less than the PMI associated with conventional loans, but they can be required for the entire length of the loan term.
- If you make a down payment of less than 10% on an FHA loan, you will pay MIP for the entire loan term.
- If you make a down payment of 10% or more on an FHA loan, your MIP payment can be removed after 11 years of on-time mortgage payments.
There are options for refinancing and dropping mortgage insurance from your loan over time. Read more about how to drop mortgage insurance in this article.
FHA vs Conventional - Appraisal
The FHA mortgage program has a few more restrictions on the condition of the property you are buying, than a conventional mortgage does. A few more safety standards and limitations on the condition of the home are required for the home to qualify for the FHA mortgage program.
Homes that need major repairs or may have some specific safety concerns may not pass during an FHA appraisal. For this reason potential home buyers who are looking at purchasing properties with needed repairs would be more successful in completing the purchase with a conventional mortgage loan.
Choosing between an FHA Loan and a Conventional Mortgage really should come down to what best fits your needs. Generally speaking there are some trade offs for each loan program to consider:
- more flexible qualification standards
- stringent guidelines on the appraisal
- mortgage insurance payments for a longer term
- less flexible on some of the qualification standards
- offers the option to automatically drop mortgage insurance
- more flexible appraisal guidelines than FHA Loans
- often has a faster closing time than government backed mortgage programs
Our team of mortgage experts can give you a customized look at both an FHA and Conventional mortgage options for purchasing your home. Take a look at the numbers and decide which mortgage is best for you.
Reach out to us when you are ready to get per-approved for a mortgage. It is fast and FREE to get pre-approved for a mortgage with Aspire Lending.