Top 4 Differences Between FHA and Conventional Loans
FHA and conventional loans are the most common mortgage options for homebuyers. They are both excellent loans, but there are some major differences. Here is a breakdown of the top 4 differences, and a cheat sheet for who should get each kind of loan.
FHA has lower interest rates, and the rates do not depend very heavily on your credit score. With conventional loans, people with credit scores above 740 get the lowest rate, and the rate goes up for every 20 points your score is below 740, all the way down to 620.
Which is better: FHA if your score is below 680. and conventional if your score is above 740. If your score is between 680 and 740, we will look at the rates for both and tell you which is going to save you the most money.
Quick Read: Improving Your Credit Score
Mortgage insurance must be paid when you get a conventional loan if the loan is for more than 80% of the property value. In other words, if you put less than 20% down, you have to pay mortgage insurance with conventional loans. With FHA loans, you must pay mortgage insurance regardless of how much money you put down. In addition, it takes longer to go away with FHA loans. If you put 10% or more down, it doesn’t go away until after 11 years, and if you put less than 10% down, it never goes away. With conventional loans, mortgage insurance goes away after you have 22% equity in the property, based on the original amortization schedule.
Almost everyone pays the same for mortgage insurance with FHA loans (it is slightly cheaper if you put 5% or more down). With conventional loans, the mortgage insurance rate depends on the amount you put down and your credit score. It is very cheap for people with excellent credit and larger down payments, and very expensive for people with poor credit and lower down payments.
Which is better? This one depends on your credit score. If you’ve got poor credit, FHA will be cheaper, and if you’ve got great credit, conventional will be cheaper.
Quick Read: Getting Rid of Mortgage Insurance
FHA loans only require 3.5% down, while conventional loans typically require 5% down. If the house you’re buying is in certain census tracts, you can get away with only 3% down with a conventional loan.
Which is better: This is a draw if the house is in a census tract that allows 3% down conventional loans, but the advantage goes to FHA if it’s not.
Bankruptcies and Foreclosures
If you have had a bankruptcy or a foreclosure, there are minimum waiting periods before you can get a mortgage, regardless of whether the loan is FHA or conventional. For bankruptcies, you have to wait 4 years before you can get a conventional loan, and you only have to wait 2 years if you get an FHA loan. For foreclosures, you have to wait 7 years to get a conventional loan, and only 3 years to get an FHA loan.
Which is better: FHA is the clear winner here because the waiting periods after bankruptcies and foreclosures are so much shorter than they are for conventional loans.
These are the main differences, but there are others as well. Two examples include how certain types of income is treated, and the impact of student loans on your approval amount. You should not try to figure out which type of loan is better by yourself because there are so many subtle differences. Call us and we’ll let you know which is best for you.