Which is Better – FHA or Conventional Loans?

FHA loans are available to all qualified buyers, and they offer several advantages over conventional loans. However, they also have a few disadvantages. So, which is better – FHA or conventional loans?

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FHA Loans

FHA loans are a popular choice for first-time homebuyers and those with less-than-perfect credit. They require a smaller down payment and credit score than conventional loans, making them attainable for many people. FHA loans are insured by the Federal Housing Administration, and they typically have lower interest rates than conventional loans.

Low down payment

FHA loans have a lower minimum down payment requirement of 3.5 percent. This can make it more accessible for first-time homebuyers and those with lower incomes or less money saved for a down payment. Conventional loans typically require a minimum down payment of 5 percent.

More flexible credit requirements

FHA loans have more flexible credit requirements than conventional loans. With an FHA loan, you can qualify for a loan with a credit score as low as 580. With a conventional loan, the minimum credit score is 620.

FHA loans also allow you to use alternative credit sources, such as utility bills and rent payments, to help you qualify for a loan. Conventional loans generally do not allow you to use alternative credit sources.

If you have a bankruptcy or foreclosure in your history, you may still be able to qualify for an FHA loan. With a conventional loan, you generally need to wait at least two years after a bankruptcy or foreclosure before you can qualify for a loan.

More forgiving on bankruptcy and foreclosure

FHA loans are more forgiving if you have gone through a bankruptcy or foreclosure. With a conventional loan, you may have to wait four years after a bankruptcy and seven years after a foreclosure before you can qualify for a loan. With an FHA loan, you may be able to get a loan two years after a bankruptcy and three years after a foreclosure.

Conventional Loans

A conventional loan is a mortgage that is not backed or insured by the government, such as the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). Conventional loans are available from banks, credit unions, and mortgage companies. The main advantage of a conventional loan is that it typically has a lower interest rate than a government-backed loan.

Higher credit score requirements

Conventional loans typically have higher credit score requirements than FHA loans. For example, a typical FHA loan requires a minimum credit score of 580, while a typical conventional loan requires a minimum credit score of 620. This difference in credit score requirements is just one factor that can help you assess whether an FHA loan or a conventional loan is the right choice for you.

Lower interest rates

If you’re looking to save money on your mortgage, you might want to consider a conventional loan. Conventional loans typically have lower interest rates than other types of loans, such as FHA loans. That means you could potentially save money on your monthly mortgage payments.

Conventional loans also tend to have lower fees than other types of loans. For example, you might not have to pay for private mortgage insurance (PMI) if you put down a 20% down payment. With an FHA loan, you’ll likely have to pay for PMI no matter how much money you put down.

You might be able to get a longer loan term with a conventional loan than an FHA loan. That means you’ll have more time to pay off your mortgage, and you won’t be as rushed to do so.

If you’re trying to decide between an FHA loan and a conventional loan, compare the interest rates, fees, and terms before making a decision.

More cash required for down payment

Conventional loans are typically thought of as requiring 20 percent or more of the purchase price for a down payment. However, for the right borrower with the right mix of credit, income and other factors, there are conventional loan programs that may require as little as 3 percent down.

A higher down payment might mean a better interest rate on your mortgage, so it can be worth it to save up for a larger down payment if you’re able. But remember that you’ll also have to pay closing costs when you buy a home, so factor that into your savings goals.

The bottom line is that you shouldn’t make a decision about which type of mortgage is best for you based solely on the amount of the down payment. Other factors like credit score, income and debts will also play a role in getting approved for a mortgage and getting the best interest rate.