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FHA vs. Standard Loans: Which Is Higher?

When it comes to buying a new home, you have a few types of home loans to choose from. When investigating loans, potential homebuyers often compare the FHA to the traditional loan. There are certain stereotypes associated with each type of loan. However, we are here to bring you the facts about FHA and conventional loans. This post will help you understand what each loan is, familiarize you with the differences between them, and provide some guidelines for choosing the most suitable loan for you.

What is an FHA Loan?

An FHA loan is insured with the Federal Housing Administration (FHA). These loans are made by private lenders, but the lenders are protected from loss by the FHA if the homeowner fails to repay. FHA loans are typically used to refinance or buy a home.

What is a conventional loan?

A traditional loan is provided by a private lender and is not insured nationwide. The requirements for obtaining a conventional loan vary depending on the lender. When buying real estate, traditional loans are typically called mortgages.

Differences Between FHA and Conventional Loans

The main difference between FHA and conventional loans is whether or not they are insured by the federal government. Traditional loans are not federally supported, so borrowing money is riskier for the lender. On the flip side, FHA loans are government protected and can usually make better deals because of the lower risk.

This difference in federal insurance is why FHA and conventional loans vary in terms of the details of the loan. Read on to learn the differences in loan requirements, minimum down payments, debt-to-income ratios, credit limits, mortgage insurance, and closing costs.

FHA loans
Conventional loan
Minimum credit score
500
620
Minimum deposit
3.5%
3%
Maximum debt to income ratio
500 credit score: 43%
580+ credit score: 43-50%
620 credit score: 33-36%
740+ credit score: 36-45%
Credit limits
Low-cost counties: $ 356,362
High-priced counties: $ 822,375
Contiguous US: $ 548,250
High-cost counties, AK, HI, and US territories: $ 822,375
Mortgage insurance
Mortgage insurance premiums required.
Private mortgage insurance required with down payments of less than 20%.
Property standards
Stricter standards, real estate purchased must be a primary residence.
Flexible standards, real estate does not have to be a primary residence.

swell: FHA Handbook on Single Family Home Policy | Fannie Mae 1 2 | Federal Office for Housing Financing | Freddie Mac | HUD 1 2 | Consumer Financial Protection Office 1 2

Credit score

Your credit score is a crucial factor in your credit score. Your credit score is measured on a scale from 300 (bad credit) to 850 (excellent credit). Good loans help you to get loans easier and on better terms. FHA and conventional loans differ in their creditworthiness requirements and represent financial options for individuals on both ends of the credit spectrum.

Minimum FHA Loan Score: 500

Accepts a credit score of only 500 but usually with a 10% deposit
These loans accept lower credit scores because they are insured
Note: Some lenders may only issue FHA loans with higher credit scores

Minimum score for conventional loans: 620

The accepted score can vary from lender to lender
These loans are typically offered to people with strong credit as they pose a lower risk to lenders

Minimum deposit

A deposit is the amount of money paid upfront as a percentage of your purchase.

Minimum Down Payment for an FHA Loan:

10% of your purchase with a 500 credit score
3.5% of your purchase with a 580+ credit score

Minimum down payment for a conventional loan:

3% of your purchase can be debited with good credit
5% to 20% of your purchase price is typical

Debt to Income Ratio

Your debt-to-income ratio is the amount paid in debt each month divided by your total monthly income. To be eligible for a loan, you must meet or fall below the Maximum Debt to Income Ratio (DTI).

Maximum DTI Ratio Guidelines for FHA Loans:

43% with a credit score of 500
43-50% with a credit score of 580

Guidelines for the Maximum DTI Ratio for Conventional Loans:

33-36% with a credit score less than 740
36-45% with a credit score of 740 or higher
50% highest allowed by Fannie Mae

Credit limits

Both FHA and conventional loans have a limit on the amount you can borrow. Credit limits vary based on your location and the year your loan is borrowed. Use the Federal Housing Finance Agency 2021 to find credit limits specific to your state.

2021 FHA credit limits

High-priced counties: $ 822,375
Low-cost counties: $ 356,362

2021 conventional credit limits

Adjacent US (excluding high-cost districts): USD 548,250
Alaska, Hawaii, U.S. Territories, and High Cost Countries: $ 822,375

Mortgage insurance

Mortgage insurance is taken out to protect the lender from loss in the event you fail to repay your loan. Whether you pay for private mortgage insurance or mortgage insurance depends on your loan type and the percentage of the down payment.

FHA loans

Mortgage insurance is required for all FHA loans.
It is paid to the FHA in the form of mortgage insurance premiums and includes an upfront and monthly premium.
MIP payments last for the life of your FHA loan.
To get rid of MIPs after paying 20% ​​of your loan, you can opt to refinance into a traditional loan.

Conventional loan

Private Mortgage Insurance (PMI) is only required if a deposit of less than 20% is paid.
PMI comes in several forms: monthly bonus, upfront bonus, and shared bonuses.
The PMI requests stop once you have met one of three requirements:

The main loan amount is reduced to 80% before the loan term expires.
At least 78% of the capital amount should be paid out.
Half of your loan term has expired.

Property standards

There are several real estate standards that must be met in order to take advantage of any loan. FHA loans have stricter requirements, while traditional loans are more flexible.

FHA loans

Properties purchased with FHA loans must be your primary residence, meaning the borrower must be the resident
FHA loans cannot be used to invest in real estate (such as renting or flipping).
The title must be in the name of the borrower or in the name of a living trust

Conventional loan

Properties purchased with a conventional loan do not have to be a primary residence – second or third homes are allowed
Conventional loans can be used to purchase investment property

Advantages and Disadvantages of FHA versus Conventional Loans

Because of the various differences between FHA and conventional loans, each type has its own advantages and disadvantages.

FHA loans

Conventional loan

benefits

Qualify with low credit and high DTI
Small down payments overall
Cheaper with low credit

Lowest option for down payments with good credit ratings
PMI can be canceled
Cheaper with good credit
Ownership does not have to be your primary residence

disadvantage

Mortgage insurance premiums are required for the life of the loan
The property you buy must be your primary residence

Need higher balance and lower DTI to qualify
Usually has larger down payments
PMI required if the deposit is less than 20%

Advantages and Disadvantages of FHA Loans

FHA loans are government regulated and insured to expand flexible home ownership options. They are flexible about loans and DTI, but stricter about insurance and real estate standards.

benefits

Flexible qualifications with low credit and high DTI
Small down payments overall
Cheaper with low credit

disadvantage

Mortgage insurance premiums are required for the life of the loan
The purchased property must be your main residence

Advantages and disadvantages of conventional loans

Traditional loans can also offer flexibility, but generally only if you have good credit and lower risk to the lender. These loans have more stringent qualifications but flexibility in other areas.

benefits

Lowest option for down payments (3% with good credit rating)
Private mortgage insurance can be canceled (must meet the requirements)
Cheaper with good credit
The purchased property does not have to be a primary residence

disadvantage

Rigorous qualifications require a higher credit score and a lower DTI
Larger down payments are typical
Private mortgage insurance required with a down payment of less than 20%

Which Loan Is Better For You?

Both FHA and conventional loans have their pros and cons. Here are some general guidelines for using an FHA loan or a conventional loan.

When to Use an FHA Loan

You have a low credit score (500-619)
Your DTI rate is on the higher side (between 45 and 50%).
You can only afford a small deposit
You are planning to use the property as your main residence

When to Use an FHA Loan

When to Use a Conventional Loan

Your credit score is pretty good (620 or higher)
Your DTI rate is on the lower side (33-36%)
You can afford a larger deposit
You want flexibility in insuring and repaying your loan

When to Use a Conventional Loan

It is important that you carefully consider your options before choosing a loan. An important consideration when comparing FHA and conventional loans is that FHA loans are insured nationwide and conventional loans are not. This distinction leads to different qualification and payment requirements for each loan.

Use the information in this post to carefully compare the differences in accepted credit scores, minimum down payments, credit limits, maximum debt-to-income ratios, mortgage insurance, and property standards. Choose the loan that suits your circumstances and helps you to best afford the home of your dreams.

swell: FHA Handbook on Single Family Home Policy | US Department of Housing and Urban Development | Federal Office for Housing Financing | Freddie Mac

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