FHA loans and conventional loans are two different types of mortgage loans that borrowers can use to purchase a home or refinance an existing mortgage. Here are some of the key differences between FHA loans and conventional loans:
Loan Requirements: FHA loans are backed by the Federal Housing Administration and have more flexible credit and income requirements than conventional loans. FHA loans require a minimum credit score of 580, while conventional loans typically require a credit score of 620 or higher. FHA loans also allow borrowers to have a higher debt-to-income ratio (DTI) than conventional loans.
Down Payment: FHA loans require a minimum down payment of 3.5% of the home’s purchase price, while conventional loans require a down payment of at least 3%. However, borrowers with excellent credit and a low debt-to-income ratio may be able to qualify for a conventional loan with a 1% down payment.
Mortgage Insurance: FHA loans require both upfront and annual mortgage insurance premiums, which can increase the borrower’s monthly payment. Conventional loans may require private mortgage insurance (PMI) if the borrower puts down less than 20% of the home’s purchase price, but the PMI can typically be removed once the borrower has built up enough equity in the home.
Loan Limits: FHA loans have lower loan limits than conventional loans, which means borrowers may not be able to use an FHA loan to purchase a more expensive home. The loan limits vary by county and are set by the FHA.
Property Standards: FHA loans require that the property meets certain standards before the loan can be approved, such as minimum property standards and an appraisal by an FHA-approved appraiser. Conventional loans generally do not have as many property standards, but the property still needs to meet minimum standards for the loan to be approved.
In summary, FHA loans may be a good option for borrowers with lower credit scores or higher debt-to-income ratios, while conventional loans may be a better fit for borrowers with stronger credit and more savings for a down payment.
