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Conventional Loans vs. FHA Loans

November 4, 2021
/ by 
Mackenzie Kruvant
Conventional Loans vs. FHA Loans

Here's a breakdown of conventional vs FHA loans

Conventional Loans vs FHA Loans

There are many types of mortgage loans for homebuyers but the most popular two are known as conventional loans and FHA loans. Choosing between them comes down to your financial situation. Here’s what you need to know about your options.

What is a conventional loan?

Conventional loans are not insured by the government. They are mostly backed by a local or national bank.

What are the pros of a conventional loan?

You won’t have to pay mortgage insurance and may end up paying less in the long term. There is also not a fixed interest rate. This loan type is helpful if you’re looking to purchase a second, vacation, or investment home as FHA loans won’t cover these property types.

Sellers may also be more likely to go with a buyer with a conventional loan vs an FHA loan since they require an extra appraisal. If any issues are found, sellers are then required to address them before closing. This means an FHA loan may result in an extra cost and could even cost a deal to fall through.

What are the cons?

Conventional loans have historically not been an option for everyone. You need a higher credit score, income level, and a downpayment of at least 3% are needed.

What is an FHA loan?

An FHA loan is a government-backed mortgage option. They are ensured by the Federal Housing Administration. These loans have fixed interest and come in 15 or 30-year terms.

What are the pros?

They are a popular option for first-time homebuyers as they require a lower minimum credit score and down-payments than a conventional loan.

What are the cons?

Borrowers have to pay an insurance fee (called FHA mortgage insurance) since they will be putting down less than 20% upfront as a downpayment. There are two premiums—upfront and annual.

  • Annual mortgage insurance premiums are between 0.45% and 1.05%. The amount is dependent on the loan term, amount, and the initial loan-to-value ratio. This premium amount is paid monthly, so it’s divided by 12.

  • The upfront mortgage insurance premium is paid when the borrower takes out the loan and is equal to 1.75% of the loan amount. This premium can be rolled into the financed loan amount, so it’s paid as part of the loan.

As mentioned above, sellers often prefer conventional loans to FHA loans because FHA loans require an extra appraisal. If any issues are found, sellers are then required to address them before closing can happen.

How to qualify for an FHA loan:

You can qualify for an FHA loan only if the following guidelines are met:

  • You have a FICO score of 500 to 579 with 10 percent down, or a FICO score of 580 or higher with 3.5 percent down
  • You have two years of verifiable employment history
  • You can verify your income through pay stubs, federal tax returns, and bank statements
  • You use the loan to finance your primary residence
  • The property is appraised by an FHA-approved appraiser and meets HUD guidelines
  • Your monthly mortgage payments are no more than 31% of your gross monthly income
  • Your mortgage plus all monthly debt payments are no more than 43% of gross monthly income.
  • It has been at least one or two years since bankruptcy and/or three years since a foreclosure

What if I don’t want to have to take out a loan?

Taking on any type of loan comes with extra timelines, rules, and contingencies. When you’re in a seller’s market—like the one we’re in now—and properties are going to multiple offer negotiations, they can be a hindrance. Ribbon turns your offer into all cash for the strongest offer in real estate—one without a loan and the contingencies that come with it.

Learn more about how Ribbon can help you get the home you love by booking time with an expert.

Written by: 
Mackenzie Kruvant