Is This Your Situation: Should I Opt for a Conventional Home Loan or an FHA Loan?

Dated: 07/08/2018

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Those who opt for a conventional loan versus those who choose Federal Housing Administration (FHA) loans have different buyer profiles. The buyer profile for someone seeking a conventional loan will have a different financial background from someone seeking an FHA loan. In order to determine which type of mortgage loan is right for you, keep reading to learn more about these two very distinct buyer profiles.

Conventional Loan Profile

Conventional loans are not backed by the government. As such, lenders require certain fiscal standards to ensure that you are financially stable enough to make monthly mortgage payments.

Debt-to-income ratio: The typical debt-to-income ratio for someone getting a conventional home loan is at most 43 percent. This helps lenders recognize whether you have a stable enough income to pay for monthly mortgage payments. Debts such as credit card bills, student loans and child support all go into your debt-to-income ratio. 

Credit score: The higher your credit score is, the better. If you have a high credit score, then you have a shot at getting a low interest rate. However, the lowest credit score that a lender is looking for is around 620. 

Down payment: This can vary a lot, but the typical down payment is 20 percent of the purchase price. There’s a chance you could put down less money if banks are offering special programs to buy a home in certain areas. 

Private mortgage insurance (PMI): It’s easier to get away with not paying mortgage insurance when you opt for a conventional loan. However, if you put down less than 20 percent, the lender may require PMI. 

Processing time: The time it takes to get approved for a conventional loan can be much quicker than that for an FHA loan. This is because the borrower works directly with the lender, not a government agency that acts as a middleman. 

FHA Loan Profile

These loans are backed by the FHA, which offers an extra layer of security, ensuring lenders that monthly payments will be met. FHA loans often appeal to first-time homebuyers. 

Debt-to-income ratio: Forty-three percent is standard. FHA loans tend to be for those for whom a down payment will require much of their income. 

Credit score: 580 is typically the lowest possible credit score that a borrower can have to procure an FHA loan, far lower than what a conventional loan requires. 

Down payment: Unlike conventional loans, those seeking an FHA loan can put as little as 3.5 percent down. 

Mortgage insurance premium (MIP): MIPs are always tacked on to FHA loans. The borrower pays an initial 1.7 percent of the loan amount once they obtain the loan; however, this can be financed as part of the loan amount. Then, a monthly premium payment is required. The amount is determined by a certain percentage of the annual loan amount. That percentage varies, depending on the length of the loan and the amount of the down payment. 

Processing time: The processing time for an FHA loan can take longer than that of conventional loans. This is because borrowers are going through a government agency to acquire a loan and not working directly with the lender. Underwriting tends to take the longest time. 

Of course, these are just the basics. Keep in mind that laws and regulations change frequently. Contact us today for more information about conventional versus FHA loans. We’ll make sure that you’re selecting the right loan for you.

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Jane DePalma

Jane DePalma: Greater Boston Real Estate Broker I’m a client-oriented real estate broker who helps homebuyers and sellers in the Greater Boston area and surrounding suburbs. I understand and appr....

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