You may find yourself weighing FHA and conventional loans, most especially if you are buying a home for the first time. How do you know the one that’s right for your situation?
In order to decide the right option for you, let’s take an in-depth look at each of them.
Requirements of FHA Loans
FHA loans are designed for first-time buyers and ideal those with lower savings money. By FHA definition, a first-time homebuyer is someone who has not owned a property in the last 3 years. FHA is insured by the Federal Housing Administration, and thus lenders won’t lose their money if borrowers default on their loan. FHA loans enable lenders to cater to riskier borrowers.
In order to qualify for an FHA loan, you’ll need a 3.5% down payment and a credit score of at least 580. Borrowers with lower credit scores may need to pay a higher down payment up 10%.
FHA loans have debit-to-income ratio requirement of about 50%. This implies that if you earn $10,000 monthly, your payment for your loan and other debts combined should exceed $5,000.
These loans give borrowers limited buying power since they usually have a limit of $417,000 (subject to change by county and state). Also, since these loans are insured by the federal government, you need to pay an upfront mortgage insurance premium (which is about 1.75%) as well as monthly mortgage insurance (included in your monthly mortgage payment).
Pros of FHA Loans
They have lower down payments than conventional loans.
The credit score requirement is lower than conventional loans.
The debt-to-income requirement is less stringent than that of conventional loans.
Requirements of Conventional Loan
Conventional loans are meant for borrowers with well-established credit scores, great assets as well as steady income. You need a credit score that no less than 620 as well as at least 5% down payment.
However, any down payment that’s less down 20% will result in private mortgage insurance- an additional monthly fee that’s designed to mitigate the risk to the lender in case you default on your mortgage. This is the same for FHA loan, however conventional loan program typically offer lower monthly mortgage insurance rates.
Most conventional mortgages allow at most 45% debit-to-income ratio. This compares the amount of money you owe with your income. For instance, if your gross income is $10,000 per month, then you can’t spend more than $4,500 per month on your loan and other debts combined.
Pros of Conventional Mortgages
They don’t require mortgage insurance, provided you have a down payment of at least 20%.
They can cover loan amounts that are higher than FHA loans, which are limited to county limits.
Conventional loans are processed faster than FHA loans.
FHA Vs. Conventional Loan: Which Option Should You Choose?
Everyone’s personal and financial situation is different, therefore so are your financial needs. Determining which loan program to choose is best left to the professional for guidance and direction.
It’s advisable for you to explore all the financing options that are available to you; we can help you do this. We will help you review your financial situation and figure out the best mortgage loan that will cater for your needs. Kindly get in touch with us with any question you have about getting a conventional or an FHA loan.