FHA vs Conventional Mortgages: Which is the Right Choice For You?

When buying a home, choosing the right mortgage loan is crucial to your financial stability. There are several types of home loans available, each with its own advantages and disadvantages. In this article, we’ll take a closer look at two of the most common and give you the most relevant information you need on FHA vs Conventional Mortgages!

What Is An FHA Loan?

An FHA loan is a government-backed home loan insured by the Federal Housing Administration. This loan has less-restrictive qualifications, making it a good choice if you’re worried about coming up with a down payment and/or have a lower credit score.

FHA loans are available as fixed-rate or adjustable-rate mortgages (ARMs). These loans are a type of nonconforming loan, which means that borrowers don’t need to meet conventional lending standards set by Fannie Mae and Freddie Mac, though government agencies can set their own qualification standards.

What Is A Conventional Loan?

Conventional loans are home loans offered by private lenders without any direct government backing. In other words, unlike FHA loans, they aren’t insured or guaranteed by a government agency. You need to have a higher credit score, lower debt-to-income (DTI) ratio and usually a slightly higher down payment to qualify.

Conventional loans can be either conforming or nonconforming loans. Conforming loans meet Fannie Mae and Freddie Mac standards, which includes many consumer protections. Conforming loans can’t exceed conforming loan limits.

Jumbo loans are offered to those who wish to buy a home that exceeds conforming loan limits. Here at our company, we offer Jumbo Prime loans. Our jumbo loans are processed just like our conforming loans, so you get the same consumer protections with a much higher loan limit.

Nonconforming loans – most commonly, adjustable-rate mortgages (ARMs). Commonly, loan repayment terms for home loans are 15 or 30 years, however conventional loans are available for any term from 10 – 30 years.

FHA Vs. Conventional Loans: Credit Score

Lenders take a look at your credit score whether you pursue an FHA loan or a conventional loan. Your credit score is a three-digit number that represents the amount of risk a lender takes on when you borrow money.

Your credit score could range from excellent (800 and above) to poor (350 – 579), and it’s based on your credit history, among other factors. The higher your credit score, the less of a risk you are and the lower rate you’ll qualify for.

Most lenders look at your FICO® Score, a credit scoring model developed by the Fair Isaac Corporation, which ranges from 350 points (low) to 850 points (high). Lenders may also use VantageScore®, another type of credit scoring model. Your credit score and information are reported by each of the three major credit bureaus: Experian™, Equifax® and TransUnion®. Your score may vary between credit bureaus.

If you’re applying as a sole borrower, the median score between the three is considered the qualifying score. If you’re applying with another borrower, the score that’s generally considered is the lowest median score between multiple clients. There’s one notable exception we’ll get to below.

The following factors are taken into consideration to build your score:

• Whether you make payments on time
• How you use your credit
• Length of your credit history
• Your new credit accounts
• Types of credit you use

So, what credit score do you need to get a loan? That depends on the type of loan you’re after.

FHA and Conventional Credit Score Requirements

Credit score requirements for a either loan can vary depending on the lender, but there are some program standards. Here is an article on the most common requirements for mortgage loans https://www.hhlnorthwest.com/mortgage-101/what-does-my-credit-score-need-to-be-to-buy-a-house/.

FHA Vs. Conventional Loans: Mortgage Insurance

Mortgage insurance is a type of insurance that protects lenders from financial loss if a borrower defaults on their loan. Both FHA and conventional loans require mortgage insurance, but the requirements and costs are different.

Conventional Loan Mortgage Insurance

If you make a down payment of less than 20% on a conventional loan, you’ll be required to pay private mortgage insurance (PMI). PMI costs vary, but typically range from 0.3% to 1.5% of the original loan amount per year. PMI is typically cancelled when you reach 20% equity in your home, either through payments or appreciation.

FHA Mortgage Insurance

FHA loans require two types of mortgage insurance: an upfront mortgage insurance premium (UFMIP) and an annual mortgage insurance premium (MIP). The UFMIP is 1.75% of the loan amount and is typically added to the loan balance. The MIP costs vary based on the loan amount, loan term, and down payment amount. Unlike PMI, MIP is required for the life of the loan if you make a down payment of less than 10%. If you make a down payment of 10% or more, MIP is required for the first 11 years of the loan.

FHA Vs. Conventional Loans: Which One Is Right For You?

Choosing between an FHA and conventional loan depends on your personal financial situation and home buying goals. Here are some key considerations to keep in mind:

• Credit Score: If you have a lower credit score, an FHA loan may be a better option since the credit score requirements are lower. If you have a higher credit score, a conventional loan may be a better option.
• Down Payment: If you have a smaller down payment, an FHA loan may be a better option since the down payment requirements are lower. If you have a larger down payment, a conventional loan may be a better option.
• Mortgage Insurance: If you want to avoid mortgage insurance, a conventional loan with a down payment of 20% or more may be a better option. If you can’t make a 20% down payment, an FHA loan may be a better option since the mortgage insurance requirements are lower.
• Loan Limit: If you need to borrow more than the conforming loan limit, a jumbo loan may be your only option.
• Interest Rates: Interest rates vary based on your credit score, loan amount, and down payment amount. It’s important to shop around and compare rates from multiple lenders.
• Appraisal Process: FHA appraisals are generally more strict than conventional appraisals. If you’re buying a home in need of significant repairs, an FHA loan may not be the best option.

Final Thoughts

Both FHA and conventional loans have their own advantages and disadvantages. It’s important to weigh the pros and cons of each loan type and choose the one that best fits your personal financial situation and home buying goals.

At Heritage Home Loans, we offer both FHA and Conventional loans, as well as jumbo and VA loans. Our team of experienced loan officers can help you determine which loan type is right for you and guide you through the entire mortgage process. Contact us today to learn more.