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7 Key Differences Between FHA & Conventional Loans
Posted By Sivon Pichoto on May 18, 2022

There’s a stigma that follows FHA loans and conventional loans. Most people assume that FHA loans are for first-time home buyers and that conventional loans are for seasoned buyers; well, that’s not always the case. The best thing to do first is to find a lender, like Family First Funding, that will provide you insight on which loan option works best for you based on the qualification requirements needed. One of the biggest differences is that FHA loans are insured by the Federal Housing Administration and conventional loans are not insured. Here are a few other key differences:

 

1. MINIMUM DOWN PAYMENTS

A 3.5% down payment is required for borrowers with a credit score of 580+ for FHA loans. As for conventional loans, a 3% down payment is allowed, but reserved for those borrowers with credit scores in the high 600s and sufficient funds.

 

2. CREDIT SCORES

FHA loans have a minimum 580 credit score so they’re easier to qualify for. With a credit score in that range, you’ll be required to put down 3.5%, but if you’re score is 500-579 you may qualify but need to put down 10%. Conventional loans typically require a 620+ credit score – something to keep in mind too is that the lower a credit score the higher the interest rate will be!

 

3. DEBT-TO-INCOME RATIO

Your debt-to-income ratio (debt-to-income ratio is all your monthly debt payments divided by your gross monthly income) must be 50% or less in order to qualify for anFHA loan. In some cases, conventional loans allow debt-to-income ratios up to 50% but even though lenders allow debt-to-income ratios that high, approval is more likely for mortgage borrowers with DTIs of 43% or less. This number is one way lenders measure your ability to manage the monthly payments to repay the money you plan to borrow.

 

4. MORTGAGE INSURANCE

Mortgage insurance protects you and the lender in the event you default on your loan. If your down payment is less than 20% on a conventional loan, MI is required whereas FHA loans require MI regardless of the down payment amount. There are some other differences as well, but these are based on some other qualifications that your lender can discuss with you.

 

5. LOAN LIMITS

There are loan limits for both conventional and FHA loans and the maximum differs depending on the county the home is located in. Currently, the FHA loan limit is $356,362 in low-cost areas and $822,375 in expensive markets. Conventional loans are subject to the conforming loan limit set by the Federal Housing Finance Agency.

 

6. PROPERTY STANDARDS

The property’s condition and intended use are important factors when comparing FHA vs. conventional loans. FHA appraisals are more stringent than conventional appraisals. Not only is the property’s value assessed, but it is also thoroughly vetted for safety, soundness of construction and adherence to local code restrictions.

When you get an FHA loan, you have to live in the house as your primary home. Investment properties and homes that are being flipped (sold within 90 days of a prior sale) aren’t eligible for FHA loans. You can use a conventional loan to buy a vacation home or an investment property, as well as a primary residence.

 

7. REFINANCING

As far as mortgage refinancing goes, the edge goes to FHA “streamline” refinancing. With no credit check, no income verification and likely no home appraisal, it’s about as easy a refi as you can get. But there are five strict requirements for an FHA streamline refinance.

There’s another reason to refinance an FHA loan: to get rid of the monthly mortgage insurance payments. FHA mortgage insurance can’t be canceled if you made a down payment of less than 10%. To get rid of the monthly FHA premiums after you have accumulated 20% equity, you have to refinance into a conventional mortgage.

 

FHA LOANS

  • Lower credit scores allowed
  • More rigid property standards
  • Somewhat higher down payment needed
  • Private Mortgage Insurance (PMI) is required for down payments less than 20%

 

CONVENTIONAL LOANS

  • Higher credit score needed (at least 620)
  • Slightly smaller down payments allowed
  • Private Mortgage Insurance (PMI) is required for down payments less than 20%
  • More liberal property standards
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