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FHA Loan vs. Conventional Mortgage

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If you’re wondering what the difference is between an FHA loan and a conventional loan, start with reviewing descriptions of each one. Then, compare important factors that will help you make a knowledgeable decision regarding which mortgage loan works for you.

What is an FHA Loan?

The FHA loan, created in 1934, was designed to salvage a failing U.S. real estate market following the Great Depression. These loans help consumers buy properties by lowering down payments (as low as 3.5%) and credit score requirements.

If you qualify for an FHA loan lenders will work within the program requirements to help you through the process. So far, more than 48 million home buyers have benefited from the program, typically receiving low-interest rates.

What Is a Conventional Loan?

Banks and mortgage lenders offer borrowers both FHA and conventional loans. However, conventional loans aren’t insured by the federal government. This means that prospective borrowers must pass strict requirements to get approved for a mortgage loan. Conventional loans also require private mortgage insurance for down payments below 20% of the sales price.

Benefits of FHA Loan vs. Conventional Loan?

The following sections compare the benefits of FHA loan types versus conventional loan options.

Down Payment

For FHA loans, borrowers can get approved with down payments as low as 3.5%; conventional loans are approved with down payments as low as 3% but lower down payments may be accompanied by income limits.

Mortgage Insurance

Mortgage insurance on FHA loans is required when you buy the home and as part of your monthly payment throughout the life of the loan.

Mortgage insurance is not required on conventional loans with a down payment of at least 20%; the insurance is not required once the principal falls below 78% of the property value.

Minimum Credit Score

Lenders sometimes approve FHA loans for borrowers with credit scores of 500 or higher; chances of approval increase greatly with a score of 580. If you have a credit score under 580, you need a 10% down payment.

Conventional loans accept a minimum credit score of 620—some private lenders may require a 640 or higher.

Maximum Loan Amount

The maximum loan amount varies by state, county and the size of the property for FHA loans. The current limit on a single-family home is $314,827 in low-cost areas or $726,525 in more expensive neighborhoods.

For conventional loans, the maximum varies by county, state and lender. Fannie Mae and Freddie Mac loans have a maximum is $484,350 is less expensive areas and $726,525 in higher cost areas.

Other Factors

Income requirements are another important factor to consider. For FHA loans, be prepared to show your lender proof of income and employment history for the past two years. For conventional loans, you need to show income history and have a debt-to-income ratio below 45%.

The average 30-year rate for an FHA loan is 4.91%, while a conventional loan averages 4.88%. Meanwhile, the occupancy requirements for FHA have to comply with local and national safety standards. Conventional loans are more flexible, and the homeowner doesn’t have to live in the property as their primary residence

Which Loan Should You Choose?

First-time buyers face more restrictions with a conventional loan. However, the type of loan you choose is a deeply personal one. The best thing to do is to discuss both options to determine the one that works best for your family.

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