When you want to purchase a home the majority of the time you need
a mortgage. There are two of the more popular options which are FHA (Federal Housing Administration) loans and conventional loans. Both have the same purpose, but there are many big differences you should understand.
Down Payment Requirements
A conventional loan and an FHA have different requirements when it comes to down payments. FHA only requires 3.5% of the purchase price while a conventional loan requires a minimum of 5%.
Mortgage Insurance
This is another big difference because of the requirements. FHA loans require both MIP Mortgage Insurance Premium and an annual MIP. Conventional loans require PMI which is Private Mortgage Insurance if a borrower puts down less than a 20% down payment.
Credit Score Requirements
An FHA loan is easier to get because of the more lenient credit score requirements. In fact, the lowest score accepted is 580 while the conventional loan requires at least a 620. The better your credit score, the better the interest rate.
Loan Limits
FHA loans are set by the Department of Housing and Urban Development (HUD) so they do have specific loan limits based on the property’s location. Conventional loans do not have specific limits but can have limits set by the Federal Housing Finance Agency. In 2021, the maximum FHA loan limit for a single-family home in most areas is $356,362. In contrast, conventional loans do not have set loan limits but are subject to conforming loan limits set by the Federal Housing Finance Agency (FHFA). In 2021, the conforming loan limit for a single-family home in most areas is $548,250.
Qualifying Ratios
Both a Conventional and FHA loan will have to meet DTI (debt-to-income) requirements. For an FHA loan, you must have a DTI of 31% on the front end and 43% on the back end. A conventional loan you have to have a DTI on the front end of 43% and a back-end DTI of 36%. This will determine how much of your monthly earnings can go toward your monthly mortgage payment.
In order to find the loan that is best for you and your situation, call a lender who can help you determine the right steps. If you are working with a real estate sales agent, they can put you in touch with a reputable loan agent.
