Differences between a Conventional and an FHA Home Loan
The two most common types of mortgage options today are conventional loans and FHA mortgages. These programs are both used for either purchasing or refinancing a home. Conventional and an FHA home loan have a few differences. These differences are mostly based on the criteria required to qualify.
Conventional mortgages are underwritten with guidelines that have been put in place by Fannie Mae or Freddie Mac. Both companies are considered to be Government Sponsored Entities. They are privately owned companies and are intended to provide liquidity to the mortgage market.
The Federal Housing Administration has been around since 1934. Its original purpose was to help 1st time home buyers. The Federal Housing Administration insures all FHA mortgages. You have to be an approved FHA lender in order to offer an FHA home loan.
The qualifications for each are different.
- FHA mortgages have an upfront mortgage premium.
- A conventional loan does not have an upfront mortgage premium and you may have a monthly mortgage insurance premium if you go above 80% loan to value.
- An FHA mortgage will have a lower down payment requirement. Typically, you will need to have a 3.5% down payment.
- A conventional loan is going to require a 5% or higher down payment.
- An FHA mortgage will have a higher qualifying income ratio. Many programs allow borrowers to have a 50% debt ratio.
- In addition, a conventional mortgage will usually have a 45% qualifying ratio or lower.
- Conventional loans will require a higher credit score to qualify. Usually the score is 620 but often the required score is above a 660 or higher.
- An FHA loan often allows borrowers to have 620 fico scores and under.
- An FHA loan has less strict credit qualifying guidelines. Typically. a bankruptcy needs to have 2 years from discharge date to qualify sometimes this can be as little as 1 year.
- Furthermore, a conventional mortgage will have much stricter and longer guidelines surrounding bankruptcy usually 4 years.
FHA mortgages were initially intended for borrowers who are 1st time homebuyers. Because of the mortgage crisis in recent years many borrowers have turned to this program to buy or re-finance their home due to the programs slightly lower qualifications.
Conventional mortgages usually attract borrowers with higher credit scores and can take advantage of a larger down payment or more equity in their property.
In conclusion, if you would like to find out if you might qualify for a conventional or FHA mortgage for a purchase or a refinance I can be reached at 860-334-1354
Craig Thibeau/Senior Loan Officer
North East Financial
210 South Main Street
Middletown CT 06457
NMLS # 398576 Company NMLS # 117273