Conventional Loans vs FHA Home Mortgage: Which Way Ahead?

FHA-vs-conventional-loansWhen applying for a home loan, some buyers put all their focus on conventional loans and at the end fail to qualify for any of them. Fortunately, conventional loan options are not the only products available for loan seekers. FHA mortgage is one alternative that has helped many home buyers save money on down payment and qualify for an affordable mortgage. Although FHA loans have been available to buyers for quite long, they became popular only recently due to increase in awareness among buyers, needless to elaborate the contribution of their attractive features and easy to qualify requirements.

FHA Home Mortgage vs. Conventional Loans

The conventional mortgage loans are definitely not the bad loan products as they have helped thousands of home buyers fulfill their dream of having a home of their own. However, they are notably different when it comes to the comparison between the FHA home mortgage loan and the conventional loan. Understanding the key differences between these two types of loans will help your choose the best option.

Credit Factor

Conventional home loans have stricter credit requirements compared to FHA loans. Most conventional loan lenders require good credit score no less than 680. While this is the average national credit score requirement for the conventional loan, the score may vary from lender to lender that can be as high as 700.

The FHA loan, on the contrary, is insured by the Federal Government and therefore, doesn’t carry strict guidelines. The FHA lender considers applications of those with credit score less than 680 but applicants needs to have a credit score of minimum 620.

Housing Ratio

Housing ratio is the percentage of your gross income, which you can use to pay for the mortgage loan. When you apply for a home mortgage loan, lenders review your gross monthly income to determine your loan paying capacity. Income plays a key role when determining any type of mortgage loan, and according to rule, mortgage lenders offer loan to help borrowers save a great deal of their income as a contingency fund to spend on their other financial obligations. In the case of conventional loans, loan payment can’t exceed 28% of borrower’s gross monthly income, whereas the ratio increases to 30% in case of an FHA mortgage loan. For example, a borrower with a monthly income of $8,000 if acquire a conventional mortgage loan has to pay up to $2,240, whereas an FHA mortgage loan lets the borrower acquire a mortgage with a payment up to $2,400.

Down Payment

FHA mortgage loans are popular among home buyers due to their low down payment requirements. A borrower can expect a minimum down payment on a conventional mortgage loan i.e. 5% of the sales price. Whereas with an FHA home mortgage loan, the borrower is approved with only a 3.5% down payment. Therefore, if you buy a house of $300,000, that’s a difference of 4,500, and more you spend on your home purchase the more you get benefitted from an FHA home mortgage loan.

The Bottom Line

Applying for a home mortgage loan is an exciting and yet exhausting time. While some borrowers don’t pay much heed to the type of loan they are borrowing, the smart ones get benefitted by their informed decision. It is always good to know your options to choose an option that best suit your needs. Having said that, don’t just rely on lenders suggesting you a loan product. Do your homework, familiarize yourself with the different requirements of each loan options available for you.


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