Conventional and FHA loans are the two most popular types of mortgage loans in the country
Over 70% of the mortgages that are issued are conventional loans, this is because conventional loans have a higher limit than FHA loan. In this article I am going to highlight the main differences between conventional vs FHA loan requirements
This will help you make an informed decision when it comes to choosing a loan
Conventional vs FHA Loan Requirements
If you have a lower credit score it will make sense to get a FHA loan which is a government issued mortgage. They do not let you borrow as much as conventional loans though. That is why conventional loans are better for borrowers who are looking to buy properties that are bigger and more expensive.
If you are looking to get an FHA loan you will just need a minimum FICO credit score of 500 – 580 and with that score your down payment will be between 3.5% to 10%. 3.5 % being for those that have a 580 or more credit score and 10% for those that have a 500-579 score.
For conventional loans need a credit score of 620 to qualify meaning they are ideal for those that may have a great credit score, If you are looking to get this loan you have to budget for a minimum down payment of 3 to 20%
For the FHA loan when you are paying mortgage insurance premiums you have to pay an upfront premium of 1.75% of the loan value and an annual premium of 0.45% to 1.05%. The 10% down payment cancels in 11 years, while the 3.5% down payment PMI is required for the lifetime of the loan.
Whilst the private mortgage insurance premiums may range from 0.55% to 2.25% and the PMI may be canceled when the LTV ratio reaches 78%
FHA loans allow you to buy a house in a low cost area for up to $331,760 and in a high cost area it will allow you to borrow up to $765,000
The convectional loans on the other hand will allow you to borrow up to $510,400 in a low cost area and $765,600 in a high cost area
Debt To Income
This is the percentage that shows how much of a person’s income is used to cover his or her recurring debts. When they are calculating this they will calculate it at the monthly level using your gross or pre-tax income
When lenders are calculating for FHA qualification there are two numbers used
- The front end, it looks at the housing related debts only, which are your monthly mortgage payments and property tax etc
- The Back end this takes all the monthly rec curing debts into account, Which may include mortgage payment, credit cards, car loans etc.
Lenders require a 43-50% max DTI, this will always depend on the lender. For a conventional loan the max DTI can be 43%.
Calculating FHA vs. Conventional Loan Costs
I always advise people that if you are looking at the differences between a conventional and FHA loan you have to look at the differences in the monthly rec curing costs and the closing costs.
I am going to show you these differences using a 200k purchase option with the minimum requirements from each program
FHA Loan Fannie Mae Home Ready
Down Payment $7,000 $6,000
Upfront MIP $3,500 $0
Loan Amount $196,500 $194,000
Interest Rate 3.75% 4.00%
Monthly P+I $910 $926
Monthly Mortgage Insurance $136 $89
Monthly Payment $1,046 $1,115
In this scenario, Even the FHA loan required a slightly larger down payment it still ended up saving $69 in monthly principal, interest and mortgage insurance payments. The cost of third-party services or homeowner’s insurance was not accounted for but such costs tend to stay fairly similar between FHA and conventional mortgages. The lower monthly payment would of the FHA loan will recoup your higher down payment cost within 15 months and continue to save you money from there.
The actual loan estimates you receive will determine whether you take a FHA loan or conventional loan. The lenders in your area might not have one of the loan programs, This will leave you looking for other loan types or different mortgage lenders. It all comes to your personal circumstances this play a bigger role in the decision than the difference of a few hundred dollars.