With so many types of loans available, it can be difficult to choose between the options. When it comes to the two most common types, conventional and FHA, it is important to weigh the costs, benefits, and requirements to make an informed decision.
Here’s what to know about conventional and FHA loans so you can make the best decision for your situation.
FHA Loans
The Federal Housing Administration (FHA) insures FHA loans meaning lenders can offer these mortgages with more lenient requirements such as lower credit scores and higher loan limits. FHA loans can often be a great choice for first-time homebuyers or those who may not have a perfect credit history.
Conventional Loans
Unlike FHA loans, conventional loans are not government backed, meaning they are not guaranteed or insured by the U.S. government. While they possess stricter qualifications than FHA loans, they can be more flexible in other ways, such as lower down payments and larger loan sizes.
Key Differences
Credit Score and Down Payment
For conventional loans, you’ll typically need a 620-credit score to get a down payment as low as 3%. FHA loans, on the other hand, can usually be obtained with a credit score as low as 500—though a higher down payment of 10% is required. With a credit score of 580 or higher, you can often secure an FHA loan with a 3.5% down payment, making it an attractive option for buyers still working to build their credit.
Debt-to-income Ratio
Debt-to-income ratio (DTI) compares your monthly debt payments to your gross income, which helps lenders determine if you can afford a new loan. The maximum DTI for conventional loans is typically 43%, meaning monthly debts cannot exceed 43% of your income. FHA loans allow for a DTI up to 50%.
Loan Limit
The loan limit for conventional loans is $806,500 while for FHA loans the limit is $524,225 for most areas. However, in places with a higher cost of living, the loan limit for both conventional and FHA loans is $1,209,750.
When choosing between a conventional or FHA loan, your decision ultimately comes down to your individual financial situation. FHA loans may be a solid option for those with lower credit scores or limited savings for a down payment. They offer more flexibility on DTI ratios as well, making them a good choice for buyers who may have higher debt obligations.
On the other hand, conventional loans might be better suited for those with stronger credit scores and more stable finances. They offer higher loan limits and often allow for lower down payments, making them ideal for buyers looking for more flexibility in terms of loan amount and down payment size.
Ultimately, the right loan for you will depend on your credit, income, and long-term financial goals. It’s a good idea to consult with a lender to explore all your options and find the loan that best suits your needs.
