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FHA v. Conventional: Which Mortgage is Right For You?

The beginning of the mortgage loan process is filled with confusion. Federal Housing Administration (FHA) and conventional loans are among the most common mortgage programs for new homebuyers! Both loans have their unique advantages, and understanding your options will help you make the best decision.  

Down Payment

In the past, FHA loans required the lowest down-payment, typically sitting around about 3.5% down. Now, conventional loans offer a 3% down payment option for qualified buyers. In some cases, lenders offer even lower rates.

Property Standards

FHA loans require at least one of the owners be a primary resident within sixty days of closing. Investment properties or homes being sold within 90 days of the prior sale aren’t eligible for FHA loans. With a conventional home, you’re allowed to purchase a vacation home, an investment property, or a primary residence. FHA home appraisals are incredibly detailed. The property is assessed for value, safety, soundness of construction and local restriction standards.

Loan Limits

Jumbo loans, which are loans that are bigger than the loan limits set by Fannie and Freddie, fall outside of the limits of FHA and conventional loans. FHA loans must follow county-level limits, which are based on a percentage of the county’s median home price. Fannie Mae and Freddie Mac guarantee loan limits for single-family homes are $424,100 in most of the country. Depending on the county and area of the country, loan ceilings can reach much higher.

Credit Score Requirements

FHA loans are much easier to qualify for thanks to a low bar for credit scores. In most cases, a credit score of 500 or above is all that is needed for approval. Conventional loans typically require a credit score of 620 or above. For most home buyers, the lower your credit score, the higher your mortgage interest rate.

Debt-to-income ratios

To qualify for an FHA loan, the potential homeowner must have a debt-to-income ratio of 50% or less. A recent study revealed the average debt ratio for FHA loans is about 42%. Conventional loans typically require a debt to income ratio no higher than 45%. The average debt ratio for conventional loan borrowers is 34%.

Do you have more questions about how to choose the right mortgage program for your needs? Contact Assurance Financial today! Our team of home loan experts are ready and prepared to answer any of your questions. Click here for more information!

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