Conventional Versus FHA Home Loans

When it comes to getting a mortgage, borrowers have a range of options to choose from. Two of the most popular types of loans are FHA and Conventional loans. Understanding the key differences between these two types of loans is crucial when deciding which one is the best fit for your financial situation.

Here are the biggest differences between FHA and Conventional loans:

  1. Credit Score Requirements - One of the most significant differences between FHA and Conventional loans is the credit score requirements. FHA loans are designed to help people with lower credit scores or limited credit history, and they generally have more lenient credit score requirements than conventional loans. In general, borrowers with a credit score of 580 or higher can qualify for an FHA loan with a 3.5% down payment. In contrast, conventional loans typically require a credit score of 620 or higher.
  2. Down Payment Requirements - Another significant difference between FHA and Conventional loans is the down payment requirement. FHA loans require a minimum down payment of 3.5%, which can come from a gift, grant, or personal savings. In contrast, Conventional loans typically require a minimum down payment of 5%, depending on the lender's requirements and the borrower's credit score.
  3. Mortgage Insurance - Both FHA and Conventional loans require mortgage insurance, but the type of mortgage insurance differs between the two. FHA loans require two types of mortgage insurance: an upfront mortgage insurance premium (MIP) and an annual MIP. The upfront MIP can be financed into the loan amount and is currently set at 1.75% of the loan amount. The annual MIP is paid monthly and varies depending on the loan term, loan-to-value (LTV) ratio, and loan amount, but it is important to note that it will be required for the lifetime of the loan or until you refinance or sell the home. In contrast, Conventional loans may require private mortgage insurance (PMI) if the down payment is less than 20% of the home's value.  The upside is once you have 20% equity built in your home, you may request to have it removed.
  4. Property Standards - FHA loans have stricter property standards than Conventional loans. The property must meet specific requirements for safety, soundness, and security. For example, the home must have functioning plumbing and electrical systems, a sound roof, and no structural damage. Conventional loans have fewer property requirements, but the lender may still require an appraisal to assess the property's value and condition.
  5. Loan Limits - The FHA has loan limits that vary depending on the location of the property. In 2023, the FHA loan limit for a single-family home ranges from $350K to $800K or more, depending on the county. In contrast, Conventional loan limits are set by the Federal Housing Agency each year and go up to $700K or more depending on the market.  If the sale price exceeds the Conventional loan limit, it would be considered a nonconforming Jumbo loan.

In conclusion, both FHA and conventional loans have their own advantages and disadvantages. FHA loans may be a better option for borrowers with lower credit scores or limited savings for a down payment, while Conventional loans may be a better option for borrowers with higher credit scores and larger down payments. It's important to consider your financial situation, homebuying goals, and lender requirements when deciding between FHA and Conventional loans.

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