FHA mortgages/home loans are backed by the Federal Housing Administration, while conventional mortgages are not. Both types of loans have advantages for any type of buyer, but qualification criteria may vary. Here are the elements to consider while deciding between an FHA loan and a conventional loan.
Minimum Down Payment
FHA loans require a 3.5% down payment for applicants with credit scores of 580 or above. Some conventional mortgages allow for a 3% down payment, but only for borrowers with credit scores in the mid 600s and substantial savings.
Credit Ratings
FHA loans are usually a lot easier to qualify for, given that they require a credit score of just 580 to be eligible for a 3.5% down payment. If your credit score is between 500 and 579, you may have to make a 10% down payment for an FHA loan. A credit score of at least 620 is normally required for conventional loans. The lender will determine the credit score required for each type of loan. Despite the fact that the FHA sets low credit score requirements, lenders may seek a higher minimum. With a higher credit score, you’ll be offered a lower interest rate on both conventional and FHA loans.
Debt-To-Income Ratio
Your debt-to-income ratio, also known as DTI, is the percentage of your monthly income that you spend on existing debt repayments, which includes your mortgage, school loans, auto loans, and minimum credit card payments. The greater the DTI, the more likely it is that you will have difficulty paying your bills. To qualify for an FHA-backed loan, your debt-to-income ratio has to be 50% or less. Conventional loans, in some instances, enable debt-to-income ratios of up to 50%. Even though lenders occasionally approve such high debt-to-income ratios, approval is more probable for mortgage loan borrowers with DTIs of 43% or less.
Mortgage Insurance
Mortgage insurance safeguards the lender in the event of a loan repayment default. Borrowers with conventional loans must pay mortgage insurance if their down payment is less than 20%. FHA loans need mortgage insurance regardless of how much the borrower puts down.
