If you’re seeking a loan to purchase your dream house, you’ve likely come across conventional and FHA loans and wondered which one is better. Both types of loans come with their own advantages. In this post, we’ll explore these two types of loans to learn whether a conventional loan is better than a FHA loan.
Conventional loans
This type of loan is determined by the conforming loan limits set out by Fannie Mae and Freddie Mac. Because this type of loan is not insured or guaranteed by a federal agency, like an FHA loan, there are larger down payments, and stricter lending standards are used.
Conventional loans cost less than FHA loans, but they’re a lot harder to qualify for.
FHA Loans
FHA loans are loans that are backed by the Federal Housing Administration (FHA) and are known to be easier to apply for than conventional loans. One of the most common reasons why first-time buyers choose this type of loan is that it comes with smaller down payments.
Conventional Loan VS FHA Loan
Let’s take a look at how a conventional loan compares to a FHA loan.
- Credit scores and downpayment: FHA loans have a low credit score requirement of 580 with a 3.5% down payment. Conventional loans that offer a 3% down payment will require a higher credit score of 620 and higher, however for interest rate purposes you will want a score over 700.
- Interest rates: FHA loans will usually have lower interest rates because they are government backed making it seems less risky for the lender as the FHA will guarantee a portion of the loan. As mentioned, earlier, Conventional interest rates are completive with FHA rate if you have an good to excellent credit.
- Debt-to-income ratios: Your DTI will include your mortgage, auto loans, student loans and credit card payments. The higher your DTI, the higher the lender will view your risk. FHA loans accept borrowers with a DTI up to 55% and less whereas conventional loans prefer a DTI of 50% of less.
- Mortgage insurance: Conventional loans will only require mortgage insurance if your down payment is less than 20%. Once you have 20% equity in your home, you can cancel your mortgage insurance and save some money. Regardless of the down payment made, FHA loans will require mortgage insurance. You also cannot cancel mortgage insurance on a FHA loan.
Which is Better?
Both loan options have their own benefits according to your personal needs. If you have a high credit score and don’t want to be paying mortgage insurance for the next ten years, a conventional loan is better. Don’t forget, with a conventional loan, you can get down payments for as low as 3%.
Apply for a Conventional Loan in Oakhurst or Beyond
Are you ready to purchase your dream home with the help of a conventional loan? Our friendly team at Granite West Funding can help you through the application process. To schedule your consultation, please call (559) 540-2275.
