When it comes to financing a home, borrowers often face the choice between FHA (Federal Housing Administration) loans and conventional loans. Understanding the differences between these two loan types can help you make an informed decision that best suits your financial situation.
What is the difference between FHA and conventional loans?
Down Payment Requirements
One of the primary differences between FHA and conventional loans is the down payment requirement. FHA loans typically require a minimum down payment of 3.5% for those with a credit score of 580 or higher. In contrast, conventional loans often require a larger down payment, usually ranging from 5% to 20%, depending on the lender and the borrower’s financial profile.
Credit Score Criteria
FHA loans are generally more accessible for individuals with lower credit scores. Borrowers can qualify for an FHA loan with a credit score as low as 500, albeit with a higher down payment. Conventional loans, however, usually require a minimum credit score of around 620, making them less forgiving for borrowers with a damaged credit history.
Mortgage Insurance
Both FHA and conventional loans require mortgage insurance, but the costs differ. FHA loans require both an upfront mortgage insurance premium (MIP) and an annual premium, which lasts for the life of the loan if the down payment is below 10%. Conventional loans may allow for private mortgage insurance (PMI) to be canceled once the borrower reaches 20% equity.
Loan Limits
FHA loans have set nationwide limits that vary by county, which can restrict the amount you can borrow based on your location. Conventional loans, on the other hand, may offer higher borrowing limits and additional types of financing, which could be more flexible for buyers in high-cost areas.
Make an Informed Choice
Choosing between an FHA loan and a conventional loan hinges on your financial circumstances. At The Mortgage Corner, our team is ready to guide you through your options to find the perfect loan for your home-buying journey. Contact us today for personalized assistance!