We are going to discuss the advantages and disadvantages of these two loan types to get you informed as much as possible and make the right decision for you.
First, let’s talk about the requirements for the FHA LOAN (Federal Housing Administration)
These are Federal government loan types, the minimum credit score is 580 and the minimum down payment is 3.5% but if you have a 10% down payment you can have as low as 500 on your credit score. Please note these are the minimum so different lenders are allowed to put their own requirements for FHA loans. It’s in your best interest to have your credit score as high as possible to have more lenders view you as less of a risk for them.
The DTI (Debt to Income Ratio) needs to be 57% or less and please remember this is still subject to your lender’s requirements, so have this as low as possible
Here are the most notable advantages and disadvantages of FHA loans.
ADVANTAGES
| 1. Low down payment |
| 2. Low credit score requirement |
| 3. Higher DTI ratios allowed. |
| 4. Interest may be lower. |
DISADVANTAGES
| 1. Mortgage Insurance for the life of the loan |
| 2. Owner occupied |
| 3. 1.75% Mortgage Insurance premium |
| 4. Not advantageous for a seller’s market |
Notes- A. for Mortgage Insurance Loan you typically will pay (point).85% for a $600k loan divided into 12 months but if you a 10% down payment pay only for11yrs
B. The 1.75% Mortgage premium is usually paid at closing. You can roll this in to the cost of your home so doesn’t have to come from your pocket but they will add it to your loan amount.
Secondly Conventional financing is not backed by the government it is backed by a private entity. Usually, they would require a minimum 620 credit score but remember still depends on your lender. A 45% DTI (Debt to Income) ratio, no mortgage insurance (PMI) with a 20% down payment
Here are the most notable advantages and disadvantages of Conventional loans.
ADVANTAGES
1. 20% or upon down payment no PMI | |
| 2. 2nd home and Investment properties allowed |
DISADVANTAGES
| 1. Higher credit score | ||
| 2. Lower DTI ratio |
Notes- PMI (Mortgage insurance) but if you put less than 20% you can still cancel that PMI when you reach 20% equity or when your home can go up in value and reach the 20% equity please talk to your lender for further details to get rid of your PMI.
If you can get an estimate for both a Conventional and FHA loan that would be great for you to compare and see which one would suit you.
Pro tip– It’s a seller’s market so if you can secure a conventional loan that would be an advantage.
I have only discussed the two most common types of loan but there are also VA loans (for Veterans or actively serving) and USDA (willing to move to a rural area)
If you are looking for other advantages of owning a home here is a possible motivator to do so a link to my previous blog on the Tax savings of owning a home, If you have any questions please send me a message, and will get back to you as soon as possible.