What is the Difference Between FHA and Conventional Loans?

When you’re shopping for a mortgage, you’ll likely encounter the terms “FHA loan” and “conventional loan.” What’s the difference between the two? An FHA loan is a mortgage that’s insured by the Federal Housing Administration. A conventional loan is a mortgage that’s not insured by the FHA.

Down Payment

The biggest difference between FHA and conventional loans is the amount of down payment required. FHA loans have a minimum down payment of 3.5% while conventional loans have a minimum down payment of 5%.

Mortgage Insurance

Mortgage insurance is required for all FHA loans and conventional loans with less than 20% down payment. FHA loans have lower monthly mortgage insurance premiums (MIP) than conventional loans.

With an FHA loan, you’ll pay an upfront premium of 1.75% of your loan amount. You’ll also pay a small ongoing premium each month – 0.45% to 1.05%, depending on your loan amount, down payment size, and length of the loan (15- or 30-year term).

With a conventional loan, you’ll typically need private mortgage insurance (PMI) if your down payment is less than 20%. Your PMI costs can range from 0.25% to 1% of your total loan amount each year, depending on how much you put down, your credit score, and other factors.

Credit Score

Your credit score is the most important factor when it comes to getting approved for a mortgage, but what is a good credit score? FICO® scores range from 300 to 850 and the higher your score, the better your chances are of getting approved for a loan with a low interest rate. While you can technically qualify for an FHA loan with a credit score of 500, you will need to put down a 10% down payment. With a credit score of 580 or higher, you will only need to put down 3.5% to qualify for an FHA loan. For conventional loans, borrowers with a credit score of 620 or higher will typically qualify for a loan with a low interest rate.

Loan Limits

Loan limits are one of the key differences between conventional and FHA loans. FHA has up to 115% of the median home price in an area as a maximum loan limit while conventional (secured by Fannie Mae and Freddie Mac) has a maximum loan limit of $453,100 regardless of location. This makes it easier to qualify for an FHA loan if you are borrowing in a low-cost market.

Pros and Cons of FHA Loans

FHA loans are government-backed loans that are available to a wider range of borrowers. They are a good option for first-time homebuyers and people with low credit scores. However, they do have some drawbacks, such as the requirement for mortgage insurance.

Pros

There are many benefits to an FHA loan, including:
-Lower down payment requirements (as low as 3.5%)
-More flexible credit score requirements
-Easier to qualify for than conventional loans
-Can be used to finance a primary residence, second home, or investment property

FHA loans also have some drawbacks, including:
-Higher mortgage insurance premiums than conventional loans
-Limited choice of lenders (FHA loans are offered through participating lenders)

Cons

There are some significant disadvantages associated with FHA loans, including:
– Borrowers are required to pay both upfront and annual mortgage insurance premiums, which can add to the cost of the loan.
– There is a limit to how much money you can borrow with an FHA loan. In 2018, that limit is $679,650 for most of the country. However, in high-cost areas, the limit can be as high as $736,700.
– FHA loans come with strict property guidelines. If a home doesn’t meet these standards, the borrower cannot get an FHA loan.
– In some cases, it may be more difficult to qualify for an FHA loan than a conventional loan.

Pros and Cons of Conventional Loans

FHA loans are government-backed mortgages that are available to low- and moderate-income borrowers. They are typically more forgiving when it comes to credit and down payment requirements than conventional loans. However, they do come with some downsides, such as the need for mortgage insurance and higher interest rates.

Pros

-Low down payment: You can put as little as 3% down on a conventional mortgage, whereas with an FHA loan, you’ll need at least 10%.

-No mortgage insurance: You won’t have to pay this extra monthly fee with a conventional loan, assuming you put down more than 20% when you buy.

-Flexible credit requirements: Conventional loans generally have less strict credit requirements than FHA loans. You may be able to get a conventional loan even if you have relatively little credit history.

Cons

– Higher interest rates than FHA loans
– Requires a higher credit score to qualify (typically above 620)
– Cannot be used to finance a investment property or second home
– Private Mortgage Insurance (PMI) is required if you have less than 20% equity in your home

Conclusion

In conclusion, FHA and conventional loans are two different things. FHA loans are easier to qualify for because they require a lower down payment and credit score. Conventional loans are more difficult to qualify for because they require a higher credit score and down payment.

What is the Difference Between FHA and Conventional Loans?

Introduction