12/12/2022
When you read FHA and Conventional loan, do you know the difference between the two?
If not read this!
Both types of loans have their advantages for any type of buyer, however the qualification requirements differ.
There are 3 major components that determine which of the loans would be best for you.
Down Payment and Credit Score first.
FHA loans are usually easier to qualify for, especially first time homebuyers!
You can have a minimum down payment of 3.5% for borrowers with a credit score of 580 or more. You can qualify with a credit score as low as 500, but it does come with strings attached.
For example, you need to be able to put 10% down in order to get an FHA loan with a credit score of 500.
The higher your credit score, the lower your down payment needs to be for an FHA loan.
Conventional loans on the other hand typically require a credit score of 620 or higher.
A 20% down payment is not a requirement for a conventional loan, however if you can’t come up with a 20% down payment, you’ll have to pay private mortgage insurance, which is a lender’s protection in case you default on your loan.
A smaller down payment equals higher risk, private mortgage insurance payments are built directly into your monthly mortgage payments.
With either type of loan, the credit score to get a mortgage will come down to the lender.
Even though the FHA has minimum scores, lenders can require a higher minimum score. And with both loans you will be offered a better interest rate with a higher credit score.
Debt-To-Income Ratio
Your Debt-to-Income ratio is the percentage of your monthly income that you spend to pay debt, including mortgage, student loans, auto loans, child support and minimum credit card payments.
The higher your DTI, the more likely you will struggle with paying your bills on time. And lenders want to be paid just like you do!
Your DTI ratio must be 50% or less to qualify for an FHA loan.
Conventional loans allow DTI ratios up to 50% in some cases. Approval is more likely for mortgage borrowers with DTIs of 43% or less.
Recap
An FHA loan makes the most sense if the following applies to you
• You don’t have a high credit score
• You don’t have much money for a down payment
• You have a higher debt-to-income ratio
Conventional loan
• You have a higher credit score
• You have a lower debt-to-income ratio
• You are able to pay a higher down payment
Bottom line, understanding which loan is right for you is a matter of understanding your financial situation and needs.
If you need a good lender to help you get going in the right direction, send me a message and I’ll get you in touch with our lender Rylie!
