Home Loans Unveiled: Conventional vs. FHA – What is the difference?

Hey there! I’m Chris Brancato NMLS # 283469, a senior loan officer with 20 years of mortgage experience at Supreme Lending Dallas. Today, I’m here to break down the differences between Conventional loans and FHA loans. Whether you’re a first-time homebuyer or looking to refinance, understanding which of these options may satisfy your mortgage financing needs. .

What’s a Conventional Loan?

A conventional mortgage is a home loan that isn’t backed by the government. Instead, it’s offered by private lenders. To qualify for a conventional loan, you generally need a minimum credit score of 620. If you’re a first-time buyer (someone who hasn’t owned a home in the last three years), you may be able to qualify with as little as 3% down. Otherwise, a 5% down payment is required.

Let’s deep-dive into conventional loans.

• Down Payment: While 3% is the minimum for first time homebuyers, putting down 20% means you won’t have to pay private mortgage insurance (PMI). The more you put down, the lower your monthly PMI.
• Credit Score Matters: Your monthly PMI depends on your credit score and down payment. Higher scores and bigger down payments lead to lower PMI.
• Debt-to-Income Ratio: These loans have stricter requirements for your debt-to-income ratio. Even with a very good credit score, high debt or limited credit history could affect your eligibility for a conventional loan.

What’s an FHA Loan?

FHA loans are home loans that are insure the loan against borrower default backed by the Federal Housing Authority (FHA) and are designed to help people who might struggle to qualify for conventional loans. These loans allow for lower credit scores (typically as low as 580) and higher debt-to-income ratios, up to 57%.

Here’s what you need to know about FHA loans:

• Lower Down Payments: You only need a down payment of 3.5% of the purchase price.
• Credit Flexibility: Even if you have recent late payments, you may often still qualify.
• Up-Front Mortgage Insurance: FHA loans include an Up-Front Mortgage Insurance Premium (UFMIP) which is added to your base loan amount.
• Monthly Mortgage Insurance: You’ll also pay a monthly mortgage insurance premium (MIP), which is added to your loan for its entire term. The monthly MIP is calculated by multiplying the base loan amount by the annual MIP percentage and dividing it by 12.
• Lifetime MIP: With FHA loans, the MIP is paid throughout the life of the loan.
•Property Standards: The home must meet certain health and safety standards and be in good condition.
• Loan Limits: FHA loans have maximum limits based on the county. For example, in Dallas-Fort Worth, the limit is $563,500.

The Showdown: Comparing Conventional and FHA Loans

Let’s see how these two loan types stack up against each other:

• Conventional Loans

o Down Payment: 3-5% minimum.
o Debt-to-Income Ratio: Up to 50%.
o Credit Score: Minimum 620.
o PMI: Varies based on credit and down payment, ranging from 0.31% to 1.15%.

• FHA Loans:

o Down Payment: 3.5% minimum.
o Debt-to-Income Ratio: Up to 57%.
o Credit Score: Minimum 580.
o MIP: Consistent at 0.50% to 0.55%, regardless of down payment and credit score.

Pros and Cons

• Conventional Loans: Great for those with good credit and low debt to income ratios. You can avoid PMI with a 20% down payment, or once the home’s equity reached 20% the PMI drops off.
• FHA Loans: Ideal if your credit score is between 580-660 or if you have a higher debt-to-income ratio. They offer lower rates and monthly PMI in these cases. With FHA loans, the MIP is paid throughout the life of the loan
If you are still unclear, that’s what I’m here for! Submit your loan application and I will provide you with loan options based on your specific mortgage needs.

Conclusion

If you’re not ready now, we can still have a discussion to help you prepare for a future purchase. It’s never too early or late to start planning for your home ownership dreams! Ready to explore your loan options? Visit our website or give us a call at Supreme Lending Dallas. Let’s make your home ownership dreams come true!

Contact Information
Feel free to call or text me anytime! You can reach me, Chris Brancato NMLS # 283469, at 214-650-3752 or apply on my website at www.thelendingguy.com. I look forward to working with you!