Are you planning to buy a house? If it’s your first time, like many others, you might be wondering about the type of mortgage that’s right for you. Should you go for a conventional mortgage or are FHA home loans better? What are their differences? It can be confusing especially when you encounter terms like debt-to-income ratio, private mortgage insurance, and interest accrual.
However, you really need to have an understanding of both conventional and FHA mortgage options so you can decide what’s best for you.
In this post, NetLending breaks down the basics of these two types of loans so you can make an informed decision:
What FHA Loans Are
FHA or Federal Housing Administration loans or a type of mortgage that is backed or insured by the federal government. This allows even those with low credit scores or those with modest incomes and small down payments to still get a loan. Because of this, FHA loans are often preferred by first-time buyers.
Why are there FHA mortgages? It is so more Americans have the chance to be homeowners. Here’s the thing, though FHA loans are indeed insured by the federal agency, you still need approval from an FHA-approved lender to take advantage of this type of mortgage, meaning, there are still requirements to be met.
FHA Home Loan Requirements
Each year, the FHA, as well as other government agencies, publish an FHA loan handbook. That might take you too long to finish, though, so here are just some of the top FHA requirements that apply today:
- FHA Mortgage Insurance – This is mandatory for FHA loans, unlike with a conventional loan where you only have to pay when your down payment is lower than 20% of the home’s value.
- Mandatory Minimum Downpayment – You need to pay a minimum downpayment as dictated by your credit score. It could go up to 10% down payment or as low as about 3.5% if you have a good credit score.
- Debt-to-Income Ratio – You need a calculation of the amount you spend monthly on your outstanding debts and how that stands against your income. To qualify for an FHA loan, you need a DTI of 30% to 50%. The lower the DTI, the better your chances of getting approved.
- Primary Residence – The property that you plan to use the FHA loan on should be your primary residence and not a rental or vacation home.
- Verifiable Income and Employment – You need to have a minimum of two years of employment and a verifiable income to be qualified for an FHA Loan.
What Conventional Loan Is
This is a mortgage that is issued through either a bank or a mortgage lender. Unlike FHA loans, the federal government does not back this type of loan, so it’s entirely up to the lender if they’ll approve an applicant or not. This type of loan comes in different interest rates, often requiring higher credit scores, and higher down payment amounts may affect interest rates.
Conventional Loan Requirements
Homebuyers considering getting a conventional loan have to meet stricter requirements:
- Private Mortgage Insurance – If your down payment is anything less than 20%, you need to purchase mortgage insurance that you’ll have to pay monthly. There’s no need for this if the downpayment is more than 20% of the home’s total value, though.
- Credit Score – Most lenders set a minimum credit score for loan applicants.
- Debt-to-Income Ratio – Like with FHA loans, lower DTIs are favorable. However, there may be exceptions, like for people with a perfect credit score or close to that.
- Verifiable Income and Employment – Similar to an FHA loan, you need to present proof that you have a steady income for you to be qualified for a conventional mortgage.
As you can see, there are a few differences between an FHA mortgage and a conventional one. Depending on your particular situation, one could be better for you than the other. Study both options and choose one that’s more fitted to your financial health. You can also consult with loan experts to figure out which is the best option for you.
NetLending provides you with home loans in Santa Ana, California as well as Honolulu, Hawaii. Contact our team today to know about our rates and loan terms!