FHA Loans vs. Conventional Loans
Home buyers who do not have enough money for a 5% down payment or with credit scores lower than 720 should evaluate both conventional and FHA mortgages. In this article, we explain the pros and cons of each loan. Please call us at 314-329-7314 with any specific questions. We’ve been originating FHA and Conventional mortgages in Missouri since 2004.
Background:
Conventional Loans: Comply with guidelines set by FNMA and Freddie Mac. The maximum Loan Amount for a conforming conventional loan is $766,650. 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 $498,257 for single-family homes in most Missouri counties (increasing to $637,950 for duplexes, $958,350 for four-family homes).
Eligibility:
Conventional Loans:
Down payment: 5% or higher, in most cases, can be gifted by family members
Maximum Debt-to-Income Ratio: around 45%
Upfront Mortgage Insurance: None
Monthly Mortgage Insurance (760+ credit): $49/month on $100k purchase with 5% down. This payment increases to over $100/month for lower credit scores.
Mortgage Insurance Cancellation: at 80%, per borrower’s request
FHA Loans:
Down payment: 3.5% minimum, can be gifted by family members
Maximum Debt-to-Income Ratio: 50% (45% for credit scores 620-649)
One-time Government Fee: 1.75% (e.g. $1750 would be added to your $100k loan)
Monthly Mortgage Insurance: $68/month on a $100k purchase with 3.5% down
Mortgage Insurance Cancellation: Not Allowed
Closing Costs:
Conventional Loans: Sellers can cover closing costs totaling up to 3% of the purchase price of a home. We also allow gifts from close family members (parents, grandparents, siblings, etc).
FHA Loans: Sellers can cover closing costs totaling up to 6% of the purchase price of a home. Gifts from close family members are also allowed
Acceptance:
Some condominium projects are not eligible for FHA financing. We would be able to find out if a project is eligible for FHA financing before you make an offer on a home. Also, FHA loans are not offered on investment property purchases.
Summary: Pros and Cons of each loan type
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 duplexes. Summary: If you have high credit scores, not too much debt and at least a 5% down payment – a conventional loan is almost always your best choice.
FHA loans: the loans carry a much lower monthly mortgage insurance for lower credit scores. To compensate for it, there is a 1.75% upfront mortgage insurance premium. 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 a few late payments) are perfectly acceptable with FHA. FHA loans require a much lower down payment and the credit score requirement is also lower (620+). Summary: 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 5% down payment.
Please call our Carlson Mortgage loan officers at 314-329-7314 with any additional questions. We usually have some of the lowest home loan rates in Missouri, offer quick closing turn-times and do not charge any broker fees on all of our loans.
Where to go from here:
Our loan application can be found here or you can call us at 314-329-7314 to speak with one of our loan officers. Also, here is our pre-approval page, if you are looking to buy a home.