Should You Get a FHA or Conventional Loan?
If you are in the process of buying a home in Arizona, you probably notice there are different loans program to choose from. The two most popular options for first-time home buyers are conventional and FHA loans. Each loan comes with a different set of qualifications, benefits and drawbacks. Though both can be great products to help you buy a home, each has its own unique pros and cons and one may be better tailored to your income level, credit score and homebuying goals. So know the difference FHA vs conventional loan and which option may be a better fit for you.
What is a FHA loan?
An FHA loan is a home loan with insurance program backed by the Federal Housing Administration, a government agency created to help home buyers qualify for a mortgage. The FHA provides mortgage insurance on loans made by FHA-approved lenders, protecting them from the risk of borrower default.
What is a conventional loan?
A conventional loan is a mortgage loan that is not backed by a government agency. Conventional loans are funded by private financial lenders and then sold to government-sponsored enterprises like Fannie Mae and Freddie Mac.
Credit score requirements
With the FHA loan, homebuyers whose credit score is 580 or higher may qualify for the lower 3.5% down payment option, while those with a credit score between 500 and 579 may still qualify, but need at least 10% down.
Typically conventional loans require a credit score in the 620 range regardless of down payment.
The credit score requirements may vary from lender to lender.
Down payment requirements
FHA loans allow as little as 3.5% down payment – or about $7,000 on a $200,000 home.
Down payment requirements for conventional loans can vary by lender and other factors but a 3% minimum is common these day.
Both loan allow you to use gift money toward your down payment. With an FHA loan, your entire down payment can be from gift funds, while those using a conventional loan may need to put down a portion of their own funds before being able to include gift money.
Mortgage insurance costs
Conventional loans typically require private mortgage insurance unless borrowers can put down 20%. Costs for PMI can vary based on your credit score and other factors. This private mortgage insurance expense typically ends once your loan-to-value ratio reaches 80%.
FHA loans require mortgage insurance even if you are putting 20% down. FHA loans come with both a one-time upfront fee and annual mortgage insurance premium. The upfront MIP, sometimes referred to as the FHA funding fee, is 1.75% of the loan amount. This fee is due at closing as part of closing cost. The monthly MIP will be include into as part of your regular mortgage payments.
Debt-to-income ratio
One of the requirement when lender consider when getting a mortgage is debt-to-income ratio. Debt-to-income ratio is the amount of debt you owe on a monthly basis, compared to your monthly gross income. Conventional loans usually allow a maximum DTI of 43% — meaning your debts take up no more than 43% of your gross income — while FHA loans, lender may allow up to 50%. In general, lenders will want to see your debt-to-income ratio be no greater than 43%.
Loan limits
Both conventional and FHA loans limit the amount you can borrow, and the maximum loan sizes vary by county. According to the U.S. Department of Housing and Urban Development, the 2021 FHA loan limit in Arizona is $381,347 and $548,250 for conventional loan.
Property standards
The property’s condition and intended use are important factors when comparing FHA vs conventional loans. FHA appraisals are more strict than conventional appraisals. Not only is the property’s value assessed, but it is also thoroughly vetted for safety, soundness of construction and adherence to local code restrictions.
FHA loans are limited to owner-occupied properties, you have to live in the house as your primary home. Conventional loans can be used to purchase a vacation home, investment property or primary residence.
Read some of the common FHA appraisal repairs when buying home with FHA loan
Conclusion
When thinking about an FHA vs. conventional loan, it all comes down to your personal situation. FHA loans have lower credit score requirements than conventional loans, which makes them a good option for borrowers with bad credit. But if you have good credit and can qualify for conventional loans, they may be the better choice because they tend to be cheaper in long run.
Swee Ng, Realtor and Phoenix East Valley resident specializing in win-win real estate transaction through great communication and fighting for his clients’ best interest. After all, this is more than real estates, this is about your life and your dreams.
If you are looking to buy or sell your home in Phoenix AZ and surrounding area, we hope you will consider us. Contact us today for complimentary consultation.
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