As you begin your home-buying journey, you’ll discover new terminologies, mortgage lingo, and several loan options. With all these new terms at hand and the need to choose between an FHA vs. a conventional loan, it’s not uncommon to feel like the whole process becomes a bit confusing.
However, with help from the right mortgage broker in Houston, TX, you can learn the differences between these two mortgage loan options and which route will work best for you and your needs.
In the meantime, as you resume your housing search, continue reading to explore the discrepancies and various requirements for FHA and conventional loans.
What Is an FHA Loan?
An FHA (Federal Housing Administration) loan comes from a private lender. With an FHA loan, the Federal Housing Administration will back borrowers if they fail to make payments and go into default.
This way, the lender is not out thousands of dollars when lending out an FHA loan with the confidence that the government can ensure the payments continue being made if defaulted.
Why Choose FHA?
For many homeowners, FHA loans offer lower down payments and do not require as high credit scores as conventional loans. They remain a common choice for first-time homeowners or homeowners who may have some discrepancies in their credit history because of these lower down payments. In addition, borrowers can combine their closing costs with their loan amount.
FHAs make a great choice as they can help those who may not traditionally qualify for other types of loans.
Requirements for an FHA Loan
Most of the time, you’ll need a down payment of 3.5% to qualify for an FHA loan. With an FHA loan, the down payment will commonly coincide with your credit score. Therefore, the higher the credit score, the higher the down payment may be.
Lenders also need your credit history, employment history, income, and revolving credit. Other requirements include the home passing an inspection and occupancy within 60 days post-closing.
What Is a Conventional Loan?
A conventional loan refers to the standard loan supplied by most lenders. Mortgage companies lend out these loans to homebuyers and do not guarantee any kind of governmental backing if borrowers cannot make payments.
Due to this lack of governmental backing, most homeowners must pay private mortgage insurance (PMI) if the buyers cannot make more than a 20% downpayment.
Why Go for a Conventional Loan?
A conventional loan is a go-to choice for sellers because it shows that through their more strict and selective process, they see you as a more financially dependable lender. Conventional loans have more rigid financial requirements but offer more leniency in insurance options and open property purposes, including the consideration of mortgage protection insurance for added security.
Requirements for Conventional Loan
You must meet a few requirements to qualify for a conventional loan. One of these requirements includes a credit score of at least 620. Like with an FHA, conventional loans require employment history, credit history, and access to income and savings accounts to track funds.
How Credit Scores Affect Loan Eligibility
For an FHA loan, you need a minimum of a 500 credit score, and for a conventional loan, you need a 620 credit score. These credit score requirements are typically non-negotiable, and if you do not have a credit score, you need to raise your score through on-time payments and solid credit utilization with different accounts.
Differences in Loan Limits
One big difference between the two loans lies in the loan limit. FHA loans have a limit of roughly $356,000, while conventional loans have a rough limit of $548,000.
In addition to these limits, another difference is in the insurance needs. You pay a mortgage insurance premium or (MIP) with an FHA loan. This is a fixed percentage insurance rate rolled into your monthly payments.
On the other hand, with conventional loans, you can entirely skip the insurance payments if you put more than 20% down on your home’s overall price. Otherwise, you pay the private insurance each month, which ranges from 0.2-2% of the loan per year.
Debt to Income (DTI)
When comparing an FHA vs. conventional loan, you should know both loan types require that the home buyer has less than a 50% debt-to-income ratio. DTI, or debt-to-income ratio, compares how much you make monthly versus how much debt you have.
This debt comprises credit card bills, student loans, car loans, etc. This debt sum, compared to your gross monthly income, shows the percentage of your DTI. The lower the percentage you have, the better.
This means that no more than 50% of your monthly income can go toward debt for either loan type.
You want to avoid higher debt to qualify for a conventional loan. A high debt-to-income ratio indicates that you would need more funds to pay off any type of mortgage in the first place, deterring FHA and conventional loans from being within your reach.
Let Experienced Mortgage Lenders Guide Your Decision
When you want to know more about FHA vs. conventional loans, how lenders may evaluate your loan interest rate, and how to improve your credit score before buying a home, speak with expert brokers.
At Champions Mortgage, we help homeowners like you with FHA loans, assumable conventional loans, VA loans, and other loan types to find the right fit for your needs.
Champions Mortgage’s team makes the homebuying process accessible for all. All you have to do is apply for a mortgage with your information and decide on a loan type. Then, we help you close your home.
Our years of experience as loan officers will guide you as you determine which type of loan, FHA or conventional, will work for you. At Champions Mortgage, we believe everyone deserves the chance to own their dream home.
So, when you’re ready to dive into more details about FHA and conventional loans, call the expert lenders at Champions Mortgage.
Contact Champions Mortgage in Sugar Land, TX, by calling (281) 727-2500 today to explore the different home loans, get personalized home lending services, and start the homebuying process!
