Differences Between FHA & Conventional Loans
Hey guys Jeff Llamas Realtor® at ClearView Realty, so quite often I am approached and asked what is a better type of loan to purchase a house, with FHA or conventional?
Now both those options are good however, they are both different and the requirements are different as well. So, in this video I am going to touch on what those differences are and hopefully give you a better understanding on those two types of loans, so let’s get started.
In this video we will touch on FHA and Conventional loans, will touch on the required down payment. and the required minimum credit score, we will also touch on debt to income or DTI and finally will touch on mortgage insurance or PMI/MIP.
FHA Mortgage Loans require a minimum credit score of 580 or higher and it requires a 3.5 percent down payment. On a conventional loan, the required minimum credit score is 620 or higher and the down payment can be as low as 5 percent all the way up to 20 percent, depending on what the purchase is for (For first time home buyers there is a 0% down payment program for FHA mortgages and a 3% down payment for Conventional mortgages).
Let’s move to debt to income also known as DTI. So, what is DTI ratio? It is a percentage of your monthly income that will be used to pay debt including your mortgage payment, student loans, auto loans, child support, and credit card payments (It also includes any monthly payments that show up on your credit report) Now, why is DTI important? Because the lender will verify all your debt and come up with a percentage, now utilizing that percentage will let you know if you qualify for a conventional loan or a FHA loan now on a conventional loan in order to qualify your debt to income must be 43% or lower and to qualify for an FHA loan your debt to income has to be at a 50% or lower.
Now let’s talk about mortgage insurance, so mortgage insurance is exactly what it sounds like, it protects the mortgage company if the buyer defaults on their monthly payments. On an FHA loan the mortgage insurance will be required and paid on the monthly payment for the life of the loan, so if you if it takes you 30 years to pay off your loan, you are going to be paying mortgage insurance for 30 years. However, on a conventional loan it is different, if you leave a 20% down payment on the conventional loan you can waive or remove the mortgage insurance and pay absolutely no mortgage insurance for the life of the loan. Now, let’s say that you only leave 5% down payment on a conventional loan, you will be required to pay mortgage insurance until you get to 20% of the loan to value and at that point you’ll be able to remove the mortgage insurance from your loan not having to pay it any longer (Usually the mortgage company will send you a letter notifying you that you reached the 20% and you no longer will be paying the mortgage insurance)
I hope these tips and differences have helped you understand a little better on what an FHA loan is and what a conventional loan is. You can always reach out to get a more in detail consultation with us and a lender.
This information is intended for home buyers and sellers in El Paso, TX. Real estate is local, and the process and requirements may be different in other cities and states.
If you need help finding a Realtor® in other cities, we can help you find the best ones for the area.