FHA vs Conventional: Which mortgage is right for you?

With so many different home financing options available, house hunters want to know which one best meets their needs. One of the most common questions is whether an FHA loan is better than a Conventional mortgage or vice versa? The answer is … it depends.
Let’s face it. We’ve all made mistakes. And when it comes to managing credit wisely, money mistakes can make it tough to get a mortgage. Fortunately, even if your credit score is a bit embarrassing, you may still be able to qualify for a home loan. With Federal Housing Administration (FHA) financing, you only need a FICO score of 580, whereas conventional financing requires a minimum credit score of 620.
But FICO doesn’t stop there. It also affects the down payment requirement. With a score of 580 or higher FICO just needs 3.5%. Because conventional loans are only available to better-qualified borrowers, you only need 3% for a down payment.

The Numbers You Need to Know

Most borrowers are required to purchase PMI, also known as Private Mortgage Insurance or simply Mortgage Insurance. This is different than homeowner insurance, which is also required and covers the cost of your home and its contents in case of fire, tornadoes, roof leaks, theft or other losses. PMI protects the lender if you default on your mortgage payments.
Conventional loans win here because it’s only required if you have an LTV less than 80%. LTV stands for Loan To Value and represents the amount you owe compared to the value of your home. If you owe more than $160,000 on a $200,000 home, then you’ll need MI. Your lender is required to automatically drop PMI when you hit an LTV of 78% – or you can request its removal when you reach 80%.
FHA financing requires MI for all loans, for the duration of the mortgage. Because FHA loans have lower credit requirements and easier overall qualifications, it’s considered riskier for the lender – but it’s a great way to get a loan without perfect credit.
Speaking of general credit requirements, previous bankruptcy is treated differently between these two loans. You may be approved for an FHA loan just three years after foreclosure and/or two years after declaring bankruptcy. Conventional loans have seven- and four-year guidelines respectively.
Let’s talk about DTI. Your Debt To Income ratio is a really important number to know. Once again, an FHA loan has more relaxed requirements. If you spend 50% or less of your monthly income on debt (including credit cards, auto loans, the mortgage you’re applying for, etc.), you may qualify for an FHA mortgage. If you’re just getting started in your career or have other short-term income constraints, you may include non-occupant co-borrower’s income and debt as part of your DTI calculation.
Conventional loans only require a DTI that is 43% or lower. That being said, no matter which mortgage you apply for, it’s wise to be cautious about how much debt you’re taking on.
Although FHA loans are easier to qualify for, conventional financing gives you some extra options including the ability to get a mortgage for investment property or a second home.

No More Fear

One of the mortgage nightmares people talk about is the ridiculous amount of required paperwork – and the agony of waiting for the green light to finance your dream. Qualified borrowers may purchase or refinance up to $424,100 for a conventional loan, while FHA mortgages top out at $275,665.*
Fortunately, the application and approval process are much easier and faster than ever before – for FHA and conventional loans. Especially when you use Stearns Digital for your mortgage needs. This new mobile app (for Apple and Android) makes it possible for you to complete your application anytime, anywhere. 
What are you waiting for? Seriously. Don’t just sit there. It’s time to buy that home of your dreams. Get pre-approved today!

* Higher limits are available in high-cost areas. Ask us for more detail.
- By Coral Herman, Oct 17, 2017