When you are looking to buy a home, it’s important to make sure you select a mortgage that works best for your financial situation. Many people consider FHA vs Conventional Loan as they are two of the most common types of mortgages.
Here’s what you need to know about both types of mortgages so you can get qualified to purchase the home of your dreams.
What is a Conventional Loan?
A conventional mortgage is the most common type of loan.
The requirements to qualify for a conventional loans are more rigorous because they are not backed by a government agency.
Fannie Mae and Freddie Mac set conventional mortgage requirements.
What is an FHA Loan?
FHA loans are mortgages that are insured by the Federal Housing Agency. These loans are designed to help people with low income and credit purchase their first home.
Federal Housing Agency loans have more lenient requirements than conventional loans, but borrowers often end up paying extra to cover the required mortgage insurance premiums.
Conventional Mortgage Requirements
Conventional mortgages require a down payment of at least 20% and a credit score of at least 620. The bigger your down payment and the higher your credit score, the less interest you will pay. Your debt-to-income ratio must be less than 36%.
While you can qualify for a conventional loan with just a 3% down payment, you will have to buy private mortgage insurance if you put down less than 20%.
The limits on conventional loans are higher than those on FHA loans, and the limits on non-conforming conventional loans are even higher.
To qualify for a conventional mortgage, you will have to prove your identity, income, employment, and assets to your lender and meet the requirements.
FHA Mortgage Requirements
FHA loans have a minimum down payment requirement of 3.5% and a minimum credit score requirement of 500. However, you must have a credit score of at least 580, or you will need to put 10% down on your home.
The FHA requires you to purchase mortgage insurance when you get an FHA loan. This protects your lender from losing money if you default on your loan.
When you apply for an FHA mortgage, you will have to bring all the same documents that you would need to apply for a conventional mortgage. Your lender will require you to show proof of identity, income, and assets.
You should be aware that there are limits on how much you can borrow with a Federal Housing Agency loan.
FHA vs Conventional Loan: Which is Best?
While both traditional and FHA loans have their place, FHA loans are ultimately more expensive than conventional mortgages. FHA borrowers pay more interest on their loans because of the smaller down payment. They also must pay expensive mortgage insurance premiums each month.
Fortunately, if you took out an FHA loan when you purchased your home, you can refinance to a conventional loan . Once you’ve boosted your credit score and built equity in your home, you can refinance to a conventional mortgage and get rid of MIP.