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How to Choose Between an FHA or Conventional Loan

One of the hardest choices during the home buying process is deciding between an FHA loan or a conventional loan. First time home buyers especially go back and forth choosing between the two. The two programs have the biggest rivalry in the mortgage industry! Determining your loan program depends on your situation and what fits best for your family and your wallet. Let’s break down each program’s qualification factors and the pros and cons of both to help you decide which one is right for you. 

FHA Loan

The Federal Housing Administration, or FHA loans are government backed. This means if you can’t make your monthly mortgage payments due to a financial crisis (job loss, loss of a family member etc.), the FHA program offers up to 12 months of mortgage payment assistance. It’s also the most popular program for first time home buyers.

Down Payment

Single family home = 3.5% down

Duplex, triplex, multi unit = 3.5% down

Occupancy

-Owner occupied only 

-First time home buyer

-Second home

Credit

-580+ FICO

*In states with community property laws, your spouse’s credit is required to apply and qualify for an FHA loan.*

Income

W2: 2 years of same employer tax documents

Self employed: 5 years of self employed tax documents

DTI

45 / 55 maximum DTI

For example:

-Gross monthly income = $10,000

-Max monthly debt = $5,500

-Max monthly mortgage payment = $4,500

Private Mortgage Insurance

The FHA program requires private mortgage insurance (PMI).

Interest Rate

The FHA loan typically offers lower interest rates than conventional loans.

Pros

  • Government backed 
  • Popular for first time home buyers
  • Low down payment options
  • Lower minimum credit score
  • Lower interest rates
  • Higher maximum DTI 

Cons

  • Owner occupied only
  • Longer income history 
  • Private mortgage insurance 

Conventional Loan

Conventional loans are not backed by the government. This program is government sponsored under Fannie Mae and Freddie Mac. 

Down Payment

First time home buyer = 3%-5% down

Second home= 5% down

Duplex, triplex, multi unit= 15%-25% down

Occupancy

-Owner occupied 

-First time home buyer

-Second home

-Investment home 

Credit

620+ FICO with 10%-20% down payment

680+ FICO with 3%-5% down payment

*Spouse credit is NOT required in order to apply or qualify for a conventional loan.*

Income

W2: 2 years of same employer tax documents

Self employed: 1 year of self employed tax documents

DTI

45 / 50 maximum DTI

For example:

-Gross monthly income = $10,000

-Max monthly debt = $5,000

-Max monthly mortgage payment = $4,500

* If you have less than 10 payments left towards paying off a debt (except a car lease) you can omit that debt from your DTI to help qualify for more home.*

Private Mortgage Insurance

Here’s a few ways you can remove PMI from your monthly mortgage payment:

-Pay it off upfront 

-Pay more monthly until you gain 10% equity for it to fall off 

-Wait for it to automatically fall off after 11 years

Interest Rate

The conventional loan typically offers higher interest rates than FHA loans depending on your credit, DTI and down payment.  

Pros

  • Flexible occupancy 
  • Shorter income history 
  • Debt omission options
  • Options for removing PMI 

Cons

  • Higher down payment
  • Higher minimum credit score
  • Lower maximum DTI
  • Higher interest rates

Bottom Line

Depending on your situation, the FHA loan might be the best option if you have fair credit and low down payment. Or, conventional might be the best option if you have good credit and shorter income history. The best way to find out which program is right for you is to reach out to your lender so they can review both options and explain which one fits your ideal scenario.

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