If you need a loan to buy a house you may be asking if you should get a conventional loan or FHA. Which one is better? What’s the difference? The information provided will give you a clear look at the differences. This information will help you decide if the FHA or conventional loan is right for your situation.
Conventional loans and FHA loans are very different. Deciding which is right for you comes down to your credit score, down payment and debt-to-income ratio.
A conventional loan usually provides a better rate than the FHA loan and is typically a faster process. This loan will require you to have a decent credit score of at least 620 to even qualify. Although, the minimum down payment for this loan is only 5% you will want to have at least a 20% down payment to take advantage of not paying the private mortgage insurance. Another requirement of the conventional loan is having less than 43% debt-to-income ratio, meaning the amount of money you owe on things like credit cards, car loans, student loans and other debt cannot exceed 43% of your income.
FHA loans or government insured loans cater to first time home buyers and people with less than perfect credit and less money available for a down payment. FHA loans are easier to get than conventional loans due to the less restrictive requirements. In order to qualify for an FHA loan you will need at least a 3.5% down payment and your credit score should be at least 580. If your credit score is lower than 580 you could still qualify but, you will need to have a larger down payment of at least 10%. FHA loans don’t require the strict 43% debt-to-income ratio, you’re able to qualify for this loan with a higher 50% ratio.
Which Loan is right for me?
FHA loans seem like a great option for people who with less than perfect credit and with little money to put down. Buyers need to be aware of some disadvantages of these loans. The amount you can borrow is set at a certain amount but, these amounts do change and have been increased regularly. Unlike conventional loans with at least 20% down payment. FHA loans require that the buyers pay an upfront mortgage insurance premium (currently 1.75% on the loan amount) and an annual mortgage insurance. (0.85%)
If you have the credit and the down payment, a conventional loan would probably serve you best in the long run.
Do I have other loan options?
What if I don’t qualify for these loans? Do I have another option? Check your eligibility for a USDA loan.