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FHA or Conventional Loan: Which Is Better?

December 31, 2020

a piggy bank and house on a scale weighing fha or conventional loan which is better?Buying a home involves a lot of important decisions. In addition to finding the right property in a suitable location at a reasonable price, homebuyers need to decide on the right type of financing to make the purchase possible. One question many borrowers struggle with is whether they should get an FHA loan or a conventional one.

Factors To Consider When Choosing Between An FHA Or Conventional Loan

An FHA loan is insured by the Federal Housing Administration, whereas a conventional mortgage is not insured by a federal agency. A common misconception is that FHA loans are reserved for first-time buyers. Both of these loan types can be advantageous to any type of buyer, but the requirements to quality for the loans can differ.

Below is a closer look at some of the factors that borrowers should consider when deciding whether an FHA loan or a conventional one is the better choice.

Your Credit Score

To qualify for a conventional loan, a borrower typically needs a credit score of at least 620. It may be possible to get a conventional loan with a lower credit score, but the borrower will likely have to pay a higher interest rate.

In general, it is easier to qualify for an FHA loan. To be eligible for a 3.5-percent down payment, a borrower needs a credit score of at least 580. Those with credit scores between 500 and 579 might qualify for an FHA loan if they can make a 10-percent down payment.

Minimum Down Payments

An FHA loan requires borrowers with a credit score of 580 or higher to make a minimum down payment of 3.5 percent. In contrast, some conventional mortgages might allow a down payment of 3 percent if a borrower has plenty of savings and a credit score in the high 600s.

Your Debt-To-Income Ratio

loaner handing over key to a houseAnother important factor is your debt-to-income ratio, or DTI. This figure represents the percentage of your monthly pre-tax income that you need to cover all your debts, such as student loans, car loans, child support, mortgages and minimum credit card payments. Those with a higher DTI are more likely to have trouble paying their bills and represent a greater risk to the lender.

To qualify for an FHA loan, your DTI cannot exceed 50 percent. While lenders may sometimes allow a DTI closer to 50, those whose DTIs are under 43 are far more likely to be approved.

Mortgage Insurance Requirements

Mortgage insurance requirements are a big consideration when determining which type of loan is best. This insurance will protect the lender if the borrower defaults on the loan.

Mortgage insurance is always required with an FHA loan, and the premium will not be affected by a borrower’s credit score. FHA mortgage insurance premiums will last for the duration of the loan for those who make a down payment that is less than 10 percent. However, refinancing to a conventional loan can end this requirement.

With a conventional loan, a borrower is required to take out mortgage insurance if they make a down payment of less than 20 percent. Private mortgage insurance is generally more expensive for those with a low credit score, although it can end up being cheaper than mortgage insurance on an FHA loan for those whose credit scores are greater than 720. Private mortgage insurance will be canceled automatically on a conventional loan once the equity reaches 78 percent of the home’s purchase price.

The costs of the insurance vary depending on the size of the down payment with both private mortgage insurance and FHA mortgage insurance.

Loan Limits

piggy bank with money for a home loanBoth types of home loans place a limit on the amount of money people can borrow, and this can vary depending on the county of the residence. In 2020, the limit for FHA loans in low-cost areas is $331,760; this climbs to $765,600 in more expensive markets. Conventional loans must adhere to the conforming loan limit that is set by the Federal Housing Finance Agency. The limit in 2020 is $510,400 in most of the country; those that exceed this amount are considered jumbo loans.

Refinancing Considerations

Refinancing is one of the areas in which FHA loans shine. An FHA streamline refinance does not require a credit check or income verification; in many cases, no home appraisal will be needed.

Some borrowers opt to refinance an FHA loan to put an end to monthly mortgage insurance payments. Homeowners who made a down payment of less than 10 percent are required to make these payments, but once they have accumulated 20 percent in equity, they can avoid them by refinancing into a conventional mortgage.

Learn More From An Experienced Mortgage Brokerage

A home loan is a major commitment that will require ongoing payments for many years, so it is essential to discuss the available options with experts in the field before making a decision. If you are interested in learning more about the best type of home loan for your particular financial situation, get in touch with the experienced mortgage brokerage at MyLendingPal.

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MyLendingPal, Inc, NMLS ID #1734346, (www.nmlsconsumeraccess.org); Corporate Office: 5400 Laurel Springs Parkway, Suite 304, Suwanee, GA 30024. Georgia Residential Mortgage Licensee #61544. Principal Loan Originator: Ricky Merchant, NMLS ID: 1517056. Georgia License # 54264. For questions regarding state licensing, please contact (404) 433-8918. Not all products and options are available in all states. Terms are subject to change without notice. Any rates or terms are speculative only and can change without notice.
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MyLendingPal, Inc
MyLendingPal, Inc
5.0
Balachandar Sundaresan
Balachandar Sundaresan
17:30 23 Jun 20
Roger Merchant and his team were very helpful, right from getting a great rate to completing all process on time and being super responsive. Would happily recommend him!!
Dinesh Nair
Dinesh Nair
14:41 30 Jan 20
I would definitely recommend MyLending Pal for all mortgage needs. It all started with a great competitive quote on refinance and excellent service continuing all the way until closing. Priti, Ricky and Roger were a pleasure to work with.
Ramesh Kumar
Ramesh Kumar
02:03 17 Dec 19
I would really recommend Nations First Home Mortgage, if you are looking for the best home mortgage options. I was very much glad to work with this team and they have saved lot of time and money!!
gulshan rai
gulshan rai
03:21 17 Apr 19
I would highly recommend Mr Roger to anyone in the area looking for an amazing lender. He made the mortgage process so easy and effortless. I could tell him and his team were very attentive to all the details that came with applying for a mortgage and were quick to remind me of any deadlines that were approaching.It was super easy to work with Mr Roger.My special thanks to preeti who did an amazing job to get things done in the timely manner. If I had any questions, it was almost like she was waiting at her desk for my phone call to answer the questions immediately. The loans closed on time and without a glitch. I would highly recommend them to anyone
Ajith Nair
Ajith Nair
01:50 13 May 19
We highly recommend Roger for financing mortgage. Roger and his team were excellent through out the process and we had a very smooth purchase. They were always available when we had any questions. It was an amazing experience working with Roger and his team.
Pratul Patwari
Pratul Patwari
13:03 20 Jul 20
Roger Merchant and Priti Vin helped us in buying our first home. They understood our needs and took care of everything for us. They were very good with the communication through the process. They will always be my first choice in future for the mortgage services.
Sujatha Hariharan
Sujatha Hariharan
20:51 26 Jul 20
They were able to find me great rates. Service was quick and communication prompt. The loan process can be daunting as is the document gathering process but this was the easiest and quickest that I have experienced. Highly recommend!
Dinesh Nair
Dinesh Nair
15:53 30 Jul 20
I would definitely recommend MyLending Pal for all mortgage needs. It all started with a great competitive quote on refinance and excellent service continuing all the way until closing. Priti, Ricky and Roger were a pleasure to work with.
Manu Pushpanath
Manu Pushpanath
15:59 29 Jul 20
Great lender to work with. Right from document collection till closing they did it in 2weeks. The fastest closing I heard and get to experience myself. One improvement I suggest is it will be good if the closing attorney can come into the house for completing the closing. Considering current situation it will add a lot of value to the reputation. Thanks Milan and team for a good closing experience.
Sakthi S
Sakthi S
20:46 01 Sep 20
Would definitely recommend Roger and his team.Refinanced for the second time and with roger, I didn’t feel like I refinanced.The process was very smooth and fast.The rates were very competitive and it was amazingworking with Roger and his team.I’d recommend him for sure.
Sunny Patel
Sunny Patel
21:17 01 Sep 20
They were quick, courteous, and professional. They got me an excellent rate and helped make the process smooth. I would recommend using to my friends and family!
Emmitt Rathore
Emmitt Rathore
14:57 22 Dec 20
Roger helped us find an unbeatable rate!His decades of work in the industry made it easy for us to complete many processes with the lender, and helped us close on time!I will definitely be passing the good word around and recommending family and friends to him.I look forward to our next real estate transaction with them.
M Alamoti
M Alamoti
01:02 11 Jan 21
I had the experience of using their service. They know what they are doing. They are very honest, professional and caring. I have no doubt and hesitation to recommend them to anyone who is looking to purchase a home. I am very pleased for their service.
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