FHA Vs Conventional Loans: Which Loan Is Best For You?



FHA and conventional loans each have their own benefits and drawbacks. But which loan is best for you?

Let’s break it down: FHA loans are backed by the government, so they do not require a down payment. This can be attractive to those who may not have saved enough for a large down payment.

On the other hand, FHA loans come with stricter qualifications than conventional loans. Additionally, your monthly mortgage payment will be higher than it would be with a conventional loan because of the fees built into an FHA loan.

Conventional loans require a down payment and usually offer biweekly payments, but also come with more lenient qualification requirements.

You can qualify for a larger home or property with a conventional loan as well. 

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What Is An FHA Loan?



The first thing to know about an FHA loan is that it does not require a down payment. Instead, your lender requires that you save at least 3.5% of your income, which could be significantly less than that.

The borrower must also be able to demonstrate that they will be able to make their monthly mortgage payments and can keep up with other obligations. If you can prove that you can, then you can qualify for a home with an FHA loan.

Pros of an FHA loan: FHA loan applications are approved quickly. The approval time frame for an FHA loan is typically around 30 days, compared to 120 days for conventional loan applications.

With an FHA loan, lenders will not inspect your home.

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What Are The Benefits Of An FHA Loan?



FHA loans offer some of the best home financing options for many. They are often less expensive than conventional loans and can be a great option for those buying in a rural area where there is a high price tag.

They offer buyers the opportunity to have lower monthly payments, and a chance to build equity in their home faster by refinancing the home down the road.

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What are the Disadvantages of an FHA Loan?

A previous FHA rule stated that an FHA loan does not require a one-to-one debt to income ratio, but that has since been changed.

In other words, those who do not have the needed income to qualify for an FHA loan can still qualify with a conventional loan.

According to experts, they may require a higher loan amount and/or higher down payment. You can read more on the FHA program. 

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What Are The Drawbacks Of An FHA Loan?



Federal Housing Administration (FHA) loans come with a wide variety of benefits. However, it does come with a few drawbacks.

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Unlike a conventional loan, FHA loans are not risk-free. Loans originated with an FHA loan may not be able to cover the full amount of the home’s costs, so buyers who make a large down payment are unlikely to receive full payment.

While the FHA doesn’t require a minimum down payment, buyers still should make a good-faith effort to make the down payment. Like a conventional loan, FHA loans do not allow borrowers to deduct the interest on their federal taxes.

However, tax credit from the government may help mitigate the effect. The program that allows for tax deductions for FHA loans is phased out after 2017. 

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How Do You Qualify To FHA Loan

If you have a down payment and meet the minimum income requirements, you may qualify to get an FHA loan. 

Rental History and Credit Score

To qualify for an FHA loan, you must have a good credit score and a good rental history. Your rental history may include the years leading up to your FHA application date.

If your credit score is lower than the average for your age, you may need to upgrade your credit score in order to qualify. 

Your rental history may include the years leading up to your FHA application date. If your credit score is lower than the average for your age, you may need to upgrade your credit score in order to qualify.

You must not have a first mortgage on the home that was purchased with a FHA loan. 

You cannot have a history of foreclosure or any type of bankruptcy. 

What Is A Conventional Loan?



Conventional loans require a down payment and the ability to provide the income needed for the down payment, whereas FHA loans do not.

Federal Housing Administration loans are for houses with a standard mortgage: $417,000 or less for a first home purchase, and $625,500 or less for second home purchases.

However, there is some wiggle room, with a maximum loan amount of $729,750 and $729,000 and below. Some may argue that you can qualify for the lowest priced home, but FHA loans require less upfront money and have less restrictive terms.

So why not go the conventional route? What is an FHA loan? FHA loans are low-cost and take minimal upfront money. 

What Are The Benefits Of A Conventional Loan?



Lower down payment: With a conventional loan, you will pay a lower monthly mortgage payment and own a larger home with a larger property than you would with an FHA loan.

However, this means that you must have a larger down payment in order to secure this loan. Flexible payment: Your payments will be fixed every month until you sell the home.

When you sell the home, your payments will increase for a period of time to cover any closing costs. However, you will still be paying the same amount of monthly mortgage payments you would with an FHA loan.

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Favorable down payment options: If you are not willing to put a large down payment down on your home, conventional loans can work for you. One option is a government loan, which comes with no down payment. 

What Are The Drawbacks Of A Conventional Loan?



Conventional loans are popular among first-time homebuyers, but have drawbacks of their own.

Since conventional loans often require less money up front, you will need to have a larger down payment to take advantage of this type of loan. However, conventional loans also come with higher monthly mortgage payments than the FHA loan.

Additionally, you have to pay property taxes, homeowners insurance and possibly homeowner’s association dues on your property, depending on where you live.

These are charges that may not be relevant to you now, but you will be responsible for them in the future. What is the FHA loan program?

While the FHA loan program has its own perks, FHA loans also have their fair share of drawbacks. The primary disadvantage of an FHA loan is that it requires a minimum of 3. 

How Do You Qualify For A Conventional Loan?



A conventional loan requires borrowers to make a substantial down payment. A borrower with no down payment must put at least 3.5% of the home’s purchase price in cash.

However, if your income exceeds the definition of “household incomes,” then you are required to put at least 5% down.

To qualify for a conventional loan with a 20% down payment, your income needs to be $66,000 or less if married filing jointly. You can use the standard mortgage application, regardless of your income, to qualify for a conventional loan.

FHA loans are also available for both home buyers and home sellers with no down payment requirement.

But how do you qualify for an FHA loan? You can qualify for an FHA loan by making a minimum 3.5% down payment. If you put down less than 3. 

Lower Monthly Payments With Biweekly Payments; Lower Interest Rates; And More Lenient Qualification Requirements



Conventional loans require a larger down payment and come with tighter qualification requirements. These lenders also typically require a larger amount of equity in the home to qualify for the loan.

However, these loans are easier to get, and they come with lower interest rates than conventional loans. You can qualify for a larger home or property with a conventional loan as well, but the loan-to-value ratio (LTV) may be lower with conventional loans.

Estimate the Loan-to-Value Ratio If you are working with a lender who provides free consultation, and you are unsure of the LTV you may need, you can visit your local office, or go online to the lender’s website and view their calculator.

This is usually a quick and easy process. 

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Is FHA the best loan?

For many buyers, an FHA loan is the best option. But with so many different loan options available, there’s no “one size fits all” answer. 

Keep in mind that not all FHA loans are created equal. To qualify for an FHA loan, you must meet the guidelines established by the federal government. In order to qualify, you must be a first-time homebuyer and must have a decent credit score.

The closer to 700, the better. In order to qualify, your credit score must be at least 620. You may also qualify with a credit score as low as 600.

Also, you must show that you can meet your financial obligations and make a monthly payment while maintaining at least a 15 percent down payment. 

How Does Credit Score Impact FHA Loans?

You may be surprised to hear how your credit score affects your ability to get an FHA loan.

Though you may think that as long as you have a stable income, you’ll get approved for one of these loans, understanding a few things about your credit will help you make sure it’s in tip-top shape before you apply.

The first thing you should know is that the FHA loan approval process looks at more than just your income. Another important factor is your credit score.

In order to qualify for the FHA loan, your credit score must be at least 580. If your credit score is above 640, you may be eligible for an FHA loan. 

Pros And Cons Of FHA And Conventional Loan.


  • No down payment. 
  • No private mortgage insurance. 
  • Safeguards against default. 
  • Conventional loan:
  • No down payment. 
  • Saves money on closing costs. 
  • More lenient qualification requirements. 
  • Reduced closing costs. 

FHA vs Conventional Loans: Should you have FHA or Conventional?

It is a good idea to compare FHA and conventional loans. Conventional loans may give you a lower monthly mortgage payment, but can have higher interest rates and more expensive closing costs.

FHA loans may have lower rates and less expensive closing costs, but often come with higher fees and strict loan requirements.

Each loan has its pros and cons, so make sure to do your research and compare the cost of each loan. 

Conclusion



The way you choose to purchase a home can have a significant impact on your personal finances. Choosing to purchase a home with a conventional loan will require you to pay more than you would with an FHA loan.

However, if you cannot put down more than a 20% down payment, an FHA loan may be the way to go for you.

Overall, selecting the right mortgage is an important decision. An informed decision is always the best one. If you want to learn more about how to choose the right mortgage, then contact a Certified Mortgage Consultant today. 

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