If at least 3 of these statements apply to you then you may be a candidate for a conventional mortgage loan:
- Have a 640 Credit score or higher Large down payment (5%-20%+).
- Plan on putting down 20% to avoid PMI Good income (High DTI ratio).
- Purchasing a higher priced home (Over $271,050 in most areas)
Conventional loans may be cheaper if you are planning on using a 20% down payment to avoid PMI. In this case, a conventional loan is a great option, due to the fact that FHA loans will require mortgage insurance regardless of how much your down payment is. If you have a 20% down and are seeking a 80% loan to value mortgage, then a conventional mortgage will be your better option.
Conventional Mortgage Benefits:
- Higher loan amounts (up to $424,100)
- No up-front private mortgage insurance (PMI)
- Flexible guidelines on the homes condition
- PMI payments cancel when the LTV reaches 78% NO PMI with 80% loan-to-value ratio
- Mortgage insurance is less expensive (0.51% vs 0.85% with FHA) 3% down payment for conventional 97% LTV loan
Conventional Mortgage Disadvantages:
- Reserve funds are often required 620 credit score requirement (higher than FHA)
- Large down payment 5%-20% (Unless you qualify for a Conventional 97 loan which requires a 3% down payment)
- Higher interest rates More difficult to qualify for than FHA
When FHA Home Loans are Better than Conventional Loans
The great thing about these loans, is that they’re easier to qualify for. Not everyone has great credit and a large down payment, and with an FHA home loan you don’t need to. For people who have low credit scores or funds for a down payment, FHA loans are a great option. If you have a 580 credit score it is much less difficult to qualify for FHA. You will also need a low down payment of just 3.5%. While conventional loans are cheaper than FHA in the long run, FHA is cheaper up-front because they require a low down payment.
FHA Loan Benefits
- Low down payment requirement of 3.5%
- The down payment and closing costs can be given as a gift.
- Easier to get approved for than conventional loans.
- Lower credit scores accepted (580 credit score and higher)
- Lower mortgage interest rates than conventional loans.
- Reserve funds not required.
FHA Loan Disadvantages
- Lower maximum loan limits
- MIP required for the life of the loan if a borrower puts down less than 10%
- Mortgage insurance required even if putting 20% down
- Can only purchase condos that are FHA approved.
- Mortgage insurance monthly cost is higher
Comparing credit score requirements
- FHA Loan: 500-579 credit score (10% down payment)
- FHA Loan: 580+ credit score (3.5% down payment)
- Conventional Loan: 620+ credit score (5% – 20% down payment)
- Conventional 97: 640+ credit score (3% down payment)
Conventional Mortgages are cheaper
The upfront costs associated with obtaining an FHA-insured mortgage is lower with a conventional loan because of the low down payment. However, because PMI is lower on conventional loans, PMI cancels once the LTV reaches 78%, and there is no up-front mortgage insurance fee. While FHA Loans are cheaper in the beginning. Over the life of the loan conventional loans are the cheapest option.