Conventional Loans vs. FHA Loans
You’ve decided it’s time to buy a house. In addition to considering where you want to live and how big of a home you need, one of your most significant considerations will be getting qualified for a loan you can afford. Homebuyers have several different mortgage options, and it’s sometimes hard to know which is best.
Conventional loans offer one set of benefits, while FHA loans can be the best choice for other buyers. So how do you decide? The team of mortgage lending experts at Supreme Lending, one of the most sought-after mortgage lenders in DFW, can help. We’ll help you understand the pros and cons of each type of loan and guide you through the process of finding a mortgage that works for you. Here’s a brief overview of how conventional and FHA loans compare, looking at a few criteria for eligibility.
FHA and conventional lenders use credit scores to assess the risk of default. Generally speaking, FHA loans are open to borrowers with credit scores as low as 580, while conventional loans have a 620 credit score minimum. You may qualify for loans with scores below those levels in certain exceptions, but you will pay a higher interest rate.
A down payment is an indicator of your financial readiness to take on the commitment of a mortgage. FHA loans typically require a down payment of 3.5% of the purchase price. Conventional loans can go as low as 3%, but that’s generally for people with higher credit records. A good rule of thumb for traditional mortgages is a 5% down payment.
Both conventional and FHA loans set maximum loan amounts. Conventional borrowers can generally seek loans for single-family homes that sell for no higher than $647,200. The comparable FHA loan limit is $420,680 in moderate-cost areas, increasing to allow for larger purchases in higher cost-of-living venues.
In addition to limiting the maximum amount of borrowing, both FHA and conventional loans maintain requirements for ratios comparing the loan amount against the sale price. FHA loans can be approved for ratios of 50% loan-to-home value or less. The typical loan-to-value ratio for conventional loans is around 43%.
FHA loans require private mortgage insurance, also known as PMI, in every transaction. Conventional loans will waive PMI on transactions where the borrower provides 20% of the price of the home as a down payment. The higher down payment substantially reduces the potential for default.
FHA or Conventional? Ask Supreme Lending
Buying a home is a big step any time you go through it. The process involves many factors, and often it helps to have mortgage advice experience at the ready. For DFW mortgage lenders, choose Supreme Lending. Our mortgage team is dedicated to helping you through the process with the least friction possible. Together we’ll review your requirements and finances and find the right loan based on your needs. We focus on building lifelong relationships by delivering outstanding service. Call us or contact us online today for an appointment.