Are you in the market for a mortgage but unsure which type of loan is best for you? You are not alone. Many potential homebuyers struggle to decide between an FHA and conventional loans. Both types of loans can offer great terms, but it’s important to understand what each type has to offer before making a decision.
In this guide, we’ll explain the differences between FHA and conventional loans so you can make an informed decision. We’ll also discuss topics such as credit score requirements, loan limits, mortgage insurance premiums, and more!
Credit Score Requirements for FHA vs Conventional Loans
The credit score requirement is the most significant difference between FHA and conventional loans. To qualify for an FHA loan, you’ll need a minimum credit score of 580, while conventional loans require a minimum credit score of 620. If your credit score falls in the range of 500 to 579, you may be able to secure an FHA loan provided you can put down at least 10% as a down payment.
Loan Limits for FHA vs Conventional Loans
When it comes to loan limits, FHA loans are much more restrictive than conventional loans. FHA loans have lower maximum loan limits and higher minimum loan limits, meaning the amount of money you can borrow is more limited. Conventional loans have no such restrictions, meaning you can borrow as much money as you need for your home purchase.
Mortgage Insurance Premiums for FHA vs Conventional Loans
Mortgage insurance premiums (MIPs) are an important factor to consider when comparing FHA and conventional loans. FHA loans require a one-time upfront MIP, which is 1.75% of the total loan amount. Conventional loans do not require any form of mortgage insurance. If you choose to take out a conventional loan, you will have to pay private mortgage insurance (PMI) if you put down less than 20% of the home’s purchase price.
Down Payment Requirements for FHA vs Conventional Loans
One of the most significant differences between FHA and conventional loans is the down payment requirement. FHA loans only require a 3.5% down payment, while conventional loans require at least 5%. If you’re able to put down more than 20%, you will not be required to pay any form of mortgage insurance with either loan type.
Pros and Cons of Choosing an FHA or a Conventional Loan
FHA vs conventional loans should not always be seen as a zero-sum game. Each loan type has its own pros and cons, which can help you decide which loan type best fits your needs.
FHA loans offer more flexibility when it comes to credit scores and down payments. However, they also come with higher mortgage insurance premiums that must be paid upfront, meaning borrowers will need to pay more out of pocket at closing.
Conventional loans require a higher credit score and down payment, but they offer lower mortgage insurance premiums in the long run. Borrowers with good credit scores may be able to secure more favorable interest rates as well.
Deciding Between FHA and Conventional Loans
Deciding between an FHA or conventional loan can be difficult, but understanding the differences between the two will help you make an informed decision. It’s important to weigh all of your options and consider how each loan type fits into your financial goals before making a decision.
Aside from loan type, there are many other factors to consider when choosing a mortgage lender. Be sure to shop around and compare rates and fees before making your decision. With the right information and guidance, you can find the best mortgage for your situation.
We hope this guide has helped you understand the differences between FHA and conventional loans. Remember to always do your research and speak to a qualified mortgage lender before taking out a loan.