Which is Better: FHA or Conventional Home Loans?
Buying a home in Washington, Oregon, Colorado, or Idaho usually entails getting a mortgage to help finance such a big purchase. But when it comes to taking out a mortgage, there’s no one-size-fits-all.
There are several different mortgage products available out there, and the one that you choose will depend on your situation and what you’re most comfortable with. It will also depend on your credit and financial profile, which will determine what you would be eligible for.
If you’re a first time home buyer or are looking to refinance your mortgage, you might be wondering about which type of mortgage to take out.
Two popular mortgage types that are available for consumers are FHA loans and conventional loans. But what are these mortgage products, and which one is better for you?
Let’s dig deeper into what each of these are to help you determine which route to take when it comes time for you to apply for a home loan.
FHA Loans Defined
What exactly is an FHA loan? Simply put, these are home loans that are backed by the Federal Housing Administration (FHA). While the FHA insures these mortgages, it doesn’t actually supply them. Instead, mortgage lenders who are FHA-approved are the ones who hand out these types of home loans.
The FHA insures these home loans to protect lenders should borrowers default at any point. This reduces the risk of the lender and guarantees that they won’t lose their money if a borrower is no longer able to pay their mortgage. Because of this, lenders can be more confident to take on riskier borrowers and those who are unable to get approved for a conventional home loan.
Credit scores
These types of loans require lower credit scores, a low down payment, and more flexible income requirements, making them easier to get approved. That’s why many low to moderate-income families tend to opt for FHA loans when they apply for a mortgage to buy a home.
More specifically, a credit score of at least 580 is needed to get approved for an FHA loan. That’s considered a low credit score and is lower than what’s needed for a conventional home loan. Anyone who has struggled with their credit score and has found it to be a deterrent for typical loans may find an FHA loan a much more feasible option.
Down payments
The down payment amount is also lower for an FHA loan than what’s needed for a conventional mortgage. The minimum amount required is 3.5% of the purchase price of the home. That said, a higher down payment may be requested if your credit score is on the low end of the spectrum or your income and assets aren’t strong.
Debt ratios
The FHA has set debt ratios that borrowers must have in order to be approved for this type of loan. More specifically, the maximum debt-to-income ratio is 43%. This ratio is a comparison of how much you owe in debt every month compared to how much you earn in income. It’s the percentage of your gross monthly income that is dedicated to paying all your bills.
A 43% ratio means that your total debt load – including mortgage payments – can’t exceed 43% of your monthly income. That said, there are some exceptions, and some lenders may require debt-to-income ratios that are higher or lower than 43%, depending on other circumstances.
Mortgage insurance
FHA loans also require mortgage insurance to be paid, known as Mortgage Insurance (MIP) to protect lenders against any losses as a result of mortgage default on the part of the borrower. FHA home loans require both an upfront and an annual mortgage insurance payment, no matter what size the down payment is.
Conventional Loans Defined
Unlike an FHA loan, a conventional home loan is not backed by the government. Because of that, there’s more risk on the part of the lender, and therefore, the lending requirements are more stringent. As such, getting approved for a conventional loan is more difficult compared to an FHA loan.
Credit score
In order to secure a conventional loan, you must have a credit score of at least 620, though many lenders might insist that this number be even higher. For instance, it’s not uncommon to see conventional lenders require a credit score of at least 650 or even 680.
Down payment
The minimum down payment amount for a conventional home loan is 20%, which is what is needed to avoid paying any Private Mortgage Insurance (PMI). This is a type of insurance that is paid out by the borrower but is designed to protect the lender in case the borrower defaults on the mortgage, similar to the insurance premium paid on FHA mortgages.
Mortgage insurance
That said, there are “high-ratio” mortgage products available that allow as little as 5% to be put down. But with a down payment less than 20%, PMI must be paid.
However, unlike FHA loans, PMI on high-ratio mortgages that are not backed by the FHA can be eliminated once your loan-to-value ratio (which is the amount of your mortgage loan compared to the value of your home) reaches 78%. FHA loans require the MIP to be paid throughout the life of the loan. The only way for borrowers to get out of this premium payment with an FHA loan is to refinance to a conventional mortgage.
Loan limits
Conventional loan limits tend to be higher than those for FHA loans. FHA loans are limited in the limit of the value of the home you wish to buy. This limit varies from county to county, but it’s usually lower than conforming loan limits, which means you have less buying power in terms of the cost of the home you intend to buy.
FHA or Conventional Loans – Which is Best?
So, now that you know what FHA loans and conventional mortgages are, which one should you choose? Which one is best?
The answer to that question depends on what you can qualify for and what you’re most comfortable with. There are clear advantages and disadvantages for both types of mortgages. Conventional loans are more difficult to get approved for, but they also offer perks such as higher loan limit amounts and the possibility to avoid paying mortgage insurance premiums.
FHA loans require MIP to be paid throughout the life of the loan and loan limits are lower, but they’re also a lot easier to get approved for.
Need a Home Loan in Washington, Oregon, Colorado, or Idaho?
It’s important to speak with a seasoned mortgage specialist who can walk you through the mortgage process and help you determine which type of product to choose when buying a home in WA, ID, CO, or OR. Sammamish Mortgage has been in the business of supplying mortgages to borrowers in the Pacific Northwest for over 25 years, and we’re more than happy to help you too.
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Rashid Ameen
A blogger, online marketer, content writer, social media lover and an all-around digital guy. He started writing at a very young age and most of his skills and knowledge are self-taught. He moved into digital medium while doing a digital marketing and content training. Now, he shares his knowledge by contributing to different forums and platforms.
