When to Choose a Conventional Loan vs. an FHA Loan
March 17th, 2020
March 17th, 2020
Two of the most popular types of mortgages you can apply for in Indianapolis are conventional loans and FHA mortgages.
You might have a difficult time understanding the differences between these two types of loans and the pros and cons of each. Which type of mortgage is most appropriate for your situation?
To help you make an informed decision, below are some guidelines for when a conventional loan or FHA mortgage might make the most sense.
A conventional mortgage is not insured by a government department such as the FHA or VA. It fits within the Fannie Mae and Freddie Mac conforming mortgage guidelines.
Here are some situations where a conventional loan might make sense:
If you have a reasonably strong credit score and debt-to-income (DTI) ratio, you may be a solid candidate for a competitive mortgage with a low down payment and low interest rates. Your credit score should not be lower than 620, and your DTI ratio should not exceed around 43%
With a competitive credit score and DTI ratio, you could have a low down payment when you purchase a home with a conventional loan.
But if you are able to make a higher down payment, a conventional loan can still be a great choice even without perfect credit or an ideal DTI ratio.
Doing so can qualify you for low interest rates and no PMI requirement
With a conventional mortgage, you can not only finance the purchase of a primary residence, but also a second home, vacation home or rental property.
Property standards for conventional loans are a bit more relaxed than they are for FHA loans. The mortgage process also tends to be routine and straightforward for fast closing.
That being said, if you go through an experienced FHA mortgage company like Grandview Lending, the FHA loan process can also be rapid and easy.
An FHA mortgage is backed by the Federal Housing Administration. This backing reduces credit score and DTI ratio requirements while keeping interest rates competitive.
Following are some situations where an FHA mortgage might be most suitable.
When your credit score is under 620 and/or your DTI ratio exceeds 43%, an FHA mortgage makes it possible for you to still buy a home with low interest rates and an affordable down payment.
Of course, the higher your score is in the lower your DTI ratio is, the more competitive the loan offers you receive will be.
You do have to purchase mortgage insurance as part of your FHA loan agreement. It is a monthly ongoing expense.
An FHA mortgage is appropriate only when you can afford this expense on top of your premiums and interest.
Putting a larger down payment on a home is the key to improving conventional loan offers when your credit score is not perfect.
But this is not an option for every homebuyer. If you do not have the ability to put 20% down on a home, consider an FHA mortgage.
If your credit score is at least 500, you may qualify for a 10% down payment. If your credit score is at least 580, you may qualify for a 3.5% down payment.
Even when you put a low down payment on a home with an FHA mortgage, competitive interest rates remain available.
The reduced risk profile of an FHA mortgage combined with the insurance you are paying are what make this possible.
You cannot use an FHA mortgage to purchase a property if it will not be your primary residence.
If you do purchase a multi-use property with an FHA mortgage, you will have to live in it.
Loan limits for FHA mortgages tend to be low compared to some other types of mortgage loan limits.
For many homebuyers, this will not be an issue. If, however, you require higher loan limits, you may need a different type of loan.
Grandview Lending Can Help You Figure Out Which Type of Loan is Most Suitable for Your Needs
After reading through the post above, you should feel better informed as to the differences between conventional and FHA mortgages and which may be more appropriate given your situation.
If you have additional questions, we can provide you with detailed information specific to your concerns during your consultation. If you are ready to figure out what type of home loan is right for you in Indianapolis or elsewhere in Indiana, please give us a call at (317) 255-0062.
We provide our clients with exceptional service and integrity which has become our hallmark.