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Whether you’re considering refinancing your existing home or purchasing a new one, comparing loans side by side can help you weigh your choices. When applying for an affordable lending program, you may choose a loan backed by the government, such as an FHA loan. You may also select a conforming or conventional loan. This non-government loan “conforms” or meets the Federal Housing Finance Agency (FHFA) requirements and the funding criteria of Freddie Mac and Fannie Mae.

FHA loans have their advantages. They offer options to borrowers with lower minimum down payments and credit scores. In certain circumstances, such as if you have good credit and a qualifying debt-to-income ratio, conventional mortgage loans could be a better choice. Here’s a look at the factors to consider when deciding between a conventional loan versus an FHA loan.

Understanding the difference between Conventional and FHA loans

Government backing isn’t the only difference between conventional and FHA loans. Check out these six other ways these two loans differ.

  • 1. Credit Score
    • Conventional loan credit score: Homebuyers with scores as low as 620 may qualify.
    • FHA loan credit score: Homebuyers with scores as low as 600 may qualify.
  • 2. Debt-to-income (DTI) ratio
    • Conventional loan debt-to-income ratio: Fannie Mae and Freddie Mac now allow debt-to-income (DTI) limits of up to 50% for conforming loans.
    • FHA loan debt-to-income ratio: The maximum DTI for an FHA mortgage loan is 43% for most borrowers, higher if approved with automated underwriting findings.
  • 3. Escrow account
    • Conventional loan escrow account: An escrow account may be required for loans with a down payment of less than 20%.
    • FHA loans: Typically, all government-backed loans require a home escrow account.
  • 4. Loan limit
    • Conventional loan limits: Loan amount varies on a county-by-county level and may not exceed county limits set by the FHFA. Check conforming loan limits for the county where you’re considering purchasing.
    • FHA loan limits: Loan limits are set by the FHA every year and vary by county. Visit HUD’s website to find the latest county loan limits.
  • 5. Minimum down payment
    • Conventional loan down payment: There’s a minimum 3% down payment. For a conforming loan higher than the baseline loan limit, also known as a high-balance loan, borrowers can qualify for financing up to 95%.
    • FHA loan down payment: Down payments can be as low as 3.5%.
  • 6. Mortgage insurance
    • Conventional loan mortgage insurance: If you’re unable to save for a higher down payment of 20%, be prepared to pay private mortgage insurance (PMI).
    • FHA loan mortgage insurance: All FHA loans require mortgage insurance premiums (MIP), regardless of down payment size.

Benefits of a Conventional loan versus FHA

Homebuyers seeking a conventional loan typically enjoy the largest selection of loan options at the most competitive rates. Who can benefit from a conventional loan versus FHA?

  • Homebuyers with good credit (scores as low as 620) and a qualifying debt-to-income ratio. The percentage of your gross monthly income that goes toward your monthly debt payments is your debt-to-income ratio. If your combined monthly debts exceed 50% of your income, you may have trouble qualifying for a conventional mortgage loan.
  • Homebuyers who do not need to borrow more than their county limits

Benefits of an FHA loan versus Conventional

FHA loans are some of the easiest mortgages to qualify for because they don’t require a large down payment and are more flexible with credit scores. FHA loans are widely used by first-time homebuyers and can require upfront and annual mortgage insurance premiums. What are the benefits of an FHA loan versus conventional?

  • More flexible qualification requirements than other mortgage loans
  • Credit scores as low as 600

How to decide between an FHA or Conventional loan

Both adjustable-rate mortgages and fixed-rate mortgages are available for conventional loans and FHA loans. Also, if you’re looking to save by refinancing, both types of loans may be an option for you.

Need more guidance deciding between an FHA or conventional loan? I’m here to help you through your homebuying journey, from applying for a loan to closing and beyond. Take a step toward homeownership and contact me today.

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