Mortgage 101: FHA vs. Conventional Loans

by Reliant Home Funding /

June 29, 2021

You’ve decided to buy a house and are ready to get a loan to make your homebuying dream come true. But between an FHA loan and a conventional loan, which is the right one for you? Here’s a quick overview:

What You Need to Qualify

The Down Payment

If you want to buy a home you’ll need to have some money in the bank. 

→ FHA Loan Requirements

For an FHA loan, you’ll need at least 3.5% of the purchase price for your down payment. 

→ Conventional Loan Requirements

Conventional loans require a minimum of 3% of the purchase price. Credit-challenged borrowers, those seeking a jumbo loan, or borrowers purchasing a second home or investment property may be required to put down more money.

Your Credit Score

Credit scores are an important factor that lenders consider when determining if you qualify for a home loan.

→ FHA Loan Requirements

A credit score of 580 or higher is needed to qualify for an FHA loan, although there are some exceptions for borrowers who put more money down.

→ Conventional Loan Requirements

Borrowers with credit scores of 620 or higher can qualify for a conventional loan. If you have a strong credit score of 740 or above, you’ll be positioned for a better loan rate and lower down payment.

Debt-to-Income Ratio

To determine your debt-to-income ratio, a lender will divide your monthly debt payments by your gross monthly income (the amount before taxes and deductions). 

→ FHA Loan Requirements

Your debt-to-income ratio must be 50% or less to qualify for an FHA loan.

→ Conventional Loan Requirements

Conventional loans require a debt-to-income ratio of 45% or less.

What Else You Need to Know

Loan Limits

There are limits to how much you can borrow with both FHA and conventional loans. The limits vary depending on whether you are purchasing a home in a low-cost or high-cost area.

→ FHA Loan Limits

The 2021 FHA loan limits range from $356,362 (in low-cost counties) to $822,375 (in high-cost counties).  

→ Conventional Loan Limits

The 2021 conventional loan limits range from $548,250 (in low-cost counties) to $822,375 (in high-cost counties).

Mortgage Insurance

Private mortgage insurance (PMI) is designed to protect lenders if you default on your loan. 

→ FHA Loan Requirements

For an FHA loan, you’ll be required to pay a one-time mortgage insurance premium of 1.75% of your loan amount, plus a monthly premium after the initial cost. The monthly premiums typically range from 0.45% to 1.05% of your loan amount per year.

→ Conventional Loan Requirements

For conventional loans, only borrowers who made a down payment of less than 20% must obtain private mortgage insurance. The premiums are similar to what you would pay for an FHA loan, but the mortgage insurance can be terminated once you achieve 20% equity.

Property Condition & Intended Use

When obtaining a home loan, the house you are purchasing must be safe to live in and up to code. And how you plan to use the residence is key as well.

→ FHA Loan Appraisals

FHA appraisals are stringent. In addition to estimating the home’s value, an appraiser will also check that it meets specific criteria for safety, how well it’s constructed, and adherence to code. You must also intend to live in the home as your primary residence. Investment properties aren’t eligible for FHA loans.

→ Conventional Loan Appraisals

Conventional appraisals are similar to FHA appraisals but less stringent. Investment properties are eligible for conventional loans. You can also use a conventional loan to purchase a vacation home.

To Sum It Up

FHA loans can help those with lower credit scores purchase a home. However, the down payment will be a bit higher than a conventional loan. And borrowers will have to pay mortgage insurance premiums for the life of the loan.

Conventional loans are best for those with good credit scores. The down payment will be a bit less than an FHA loan, and there is the option to cancel mortgage insurance once 20% equity is reached.

At Reliant Home Funding, we’re happy to answer questions about FHA and conventional loans or help walk you through the process. Contact us today!

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