When it comes time to buy your next home, you may be wondering which type of loan is the best to acquire. Although there are many creative ways to finance a property, the two most common means of securing the funds and the main question are FHA vs conventional loans? Each of these options has a list of advantages for different types of buyers. You also have to determine if you meet the minimum requirements needed to secure each form of financial assistance. There is no clear winner between the two loan types. Your ideal arrangement will depend completely on the stage of life that you are currently in.
What to look for when comparing FHA vs conventional loans
There are a few key factors that separate FHA and conventional loans. You want to keep in mind creditworthiness, minimum down payment requirements, your debt-to-income ratio, and so much more. Here is a breakdown of how each loan differs in each of these fundamental areas.
Credit scores and worthiness
If you are worried about your credit score, an FHA loan is much easier to acquire. You only need a score of 500 to be approved for financing. However, a score this low will force you into a larger down payment and needlessly high APR. A score of 580 or higher will allow you to secure an FHA loan with great terms.
Conventional loans are a tad harder to come by. Lenders typically want to see at least a score of 620 before considering your application. As with FHA loans, you will want a score much higher than the minimum to avoid getting a bad offer. With excellent credit, you may even receive offers that blow FHA loans out of the water.
Minimum down payments
Houses have become so expensive that it takes most people a long while to save up even a small fraction of the cost. This means that a large down payment requirement could prevent you from locking in the home of your dreams. FHA loans present a static 3.5% or 10% down payment requirement. The lesser 3.5% payment is reserved for people with a credit score of at least 580.
A conventional lender can offer a wide range of down payment percentages based on your credit and finances. The higher the score and more savings in your bank, the more likely a lender will be to sign over the house with very little money down.
Debt-to-income ratio
Your DTI is the percentage of pretax income that you must use to pay your monthly expenses. This includes your bills, credit card balances, student loans, and any purchases you have financed. As your DTI rises, it shows a lender that you are increasingly likely to fall behind on your monthly payments. An FHA loan won’t go through if your DTI is above 50%.
You have a bit more wiggle room when it comes to conventional loans. Some lenders go with the 50% standard and others provide leeway on either side. You may even need a DTI below 40 in some extreme cases. Be sure to research any conventional lenders beforehand so you know if your DTI is within the range they are looking for.
Mortgage insurance
This monthly payment can quickly eat into your living expenses. All FHA loans require you to purchase insurance when you get approved. Conventional loans allow you to skip mortgage insurance as long as you make a down payment of at least 20%. If you can save up enough cash to waive this additional payment, then it is well worth it in the long run.
Loan size limits
FHA loans limit the total amount you can borrow for purchasing a single property. A solitary unit maxes out at $331,760 while a 4-unit maxes out at $638,100 in Cape Coral. Convention loans are capped at $510,400 for 1-unit homes and $981,700 for properties with four units. Depending on the price of your dream abode, you may be forced into one type of loan by default.
Living conditions
Homes purchased with an FHA loan must adhere to strict standards. These include guidelines on safety, build quality and compliance with local code in addition to the total valuation of the property. Simply put, the home needs to be in tip-top shape before it is approved for FHA financing.
Conventional loans aren’t limited in nearly the same way. This means that investors will need to go this route if they plan to purchase rehab units for flipping purposes. The same is true of you plan to own multiple homes since FHA loans require you to become the primary resident.
If you still have questions about FHA vs. Conventional Loans, Cape Coral Mortgage has over 20 years of experience in Cape Coral – we would be happy to look at your specific circumstances to determine which loan will best fit your needs.
