FHA Loans vs. Conventional Loans

Home buyers making a down payment of less than 10% should evaluate both conventional and FHA loans. This article will explain the pros and cons of each loan type. Please call us at 314-329-7314 with any specific questions.

Background:

Conventional Loans: Comply with guidelines set by FNMA and Freddie Mac. The maximum Loan Amount for a conforming conventional loan is $417,000. Any higher amount is called a non-conforming Jumbo loan and generally carries a higher interest rate.

FHA Loans: Guaranteed by the Federal Housing Administration, a government agency. This guarantee makes it less risky for lenders to issue the loan, which allows lenders to lower their qualification criteria. In exchange for this guarantee, the borrowers must pay an upfront mortgage insurance premium of 1.75% of the loan amount – either payable at closing or added to the loan amount. The maximum FHA loan amount is $271,050 for most counties.

Eligibility:

Conventional Loans:
Down payment: 5% or higher, can be gifted
Maximum Debt-to-Income Ratio: around 45%
Upfront Mortgage Insurance: None
Monthly Mortgage Insurance: 0.62% coverage, given 5% down ( e.g. $49/month on a 95K loan)
Mortgage Insurance Cancellation: at 80%, per borrower’s request (at 78% automatically)

FHA Loans:
Down payment: 3.5% minimum, can be gifted
Maximum Debt-to-Income Ratio: 55% (45% for credit scores 640-649)
Upfront (one-time) Mortgage Insurance: 1.75% (e.g. $1750 on a $100,000 loan)
Monthly Mortgage Insurance: 0.85% coverage ( e.g. $68/month on a 100K purchase with 3.5% down)
Mortgage Insurance Cancellation: Not Allowed

Closing Costs:

Conventional Loans: Sellers Can Cover up to 3% of the Purchase Price, Gifts from close family members are allowed
FHA Loans: Sellers can cover up to 6%, Gifts from close family members are allowed

Acceptance:

Some condominium projects and non-owner investment properties do not allow FHA financing

Summary: Pros and Cons

Conventional Loans: no upfront mortgage insurance premium, lower monthly mortgage insurance. However, you need a 700+ credit score to qualify for a good interest rate, underwriting guidelines are more stringent and larger down payments are needed on condominiums and duplexes. If you have a good credit score, not a lot of debt and a 5% down payment – a conventional loan is almost always your best choice.

FHA loans: the loans carry a higher monthly mortgage insurance and a 1.75% upfront mortgage insurance premium. However, lenders are more willing to look at the overall credit picture, rather than just the credit score alone – resulting in easier approvals. Many items that could result in loan denials on conventional loans with less than 20% down (e.g. a small collection account or one late payment) are perfectly acceptable with FHA. FHA loans require a much lower down payment and the credit score requirement is also lower (640+). They are a good choice for those with less-than-perfect credit scores, borrowers with significant debt and/or low income, and those who do not have a lot of money for down payments.

Please call us at 314-329-7314 with any additional questions.

 

 

 

7700 Clayton Road, Ste. 315
St. Louis, MO 63117
United States of America
NMLS ID: #1203639
MO License: #111990