Should You Choose a Conventional or FHA Mortgage?
If you’re planning to buy a house, you can choose a conventional mortgage or one insured by the Federal Housing Administration. It’s important to understand the requirements for each to make the right decision.
Primary Differences Between Conventional and FHA Loans
FHA loans are serviced by private mortgage lenders and insured by the FHA. Conventional loans are not insured by the federal government.
FHA and conventional lenders limit loan amounts based on location. An FHA mortgage can only be used to buy a primary residence. A conventional loan can be used to buy a house for any purpose. To quality for an FHA mortgage, the property would need to be appraised to determine its value and to make sure it was safe and conformed with local building codes.
If you had a credit score of 580 or higher and you took out an FHA loan, you would have to put down at least 3.5 percent of the purchase price. If your credit score was between 500 and 579, you might be able to get an FHA mortgage with 10 percent down.
To qualify for a conventional loan, you would most likely need a credit score of at least 620, although exact requirements vary by lender. With a conventional loan, you might be able to put down just 3 percent, but you would need a higher credit score. If you had a low credit score, you would most likely have to pay a higher interest rate.
To get an FHA mortgage, your debt-to-income ratio (the percentage of your pre-tax income that you spend to pay your debts each month) could be no more than 50 percent. You might be able to get a conventional loan with a DTI ratio that high, but most conventional lenders want a ratio of 43 percent or less.
Mortgage insurance compensates a lender if a borrower defaults on a loan. With a conventional loan, you would have to obtain private mortgage insurance if you put down less than 20 percent and pay for it until you reached 20 percent equity. With an FHA mortgage, you would have to purchase mortgage insurance no matter how much you put down and continue to pay for it as long as you had the loan if you put down less than 10 percent.
Mortgage insurance premiums for an FHA loan are the same regardless of credit score, but with a conventional loan, a higher credit score means lower PMI premiums. Either way, the amount of your mortgage insurance premiums would be based in part on the amount you put down.
You might be able to eliminate mortgage insurance by refinancing an FHA loan. The FHA Streamline Refinance is much simpler than the process to refinance a conventional loan.
Get Expert Advice
The type of mortgage you choose will affect the amount you pay each month for years to come. Talk to a mortgage professional about your financial situation to decide whether to apply for a conventional or FHA mortgage.