FHA vs. Conventional – What’s the difference?

Brought to you by Warren Bradley Partners

Seeking financing for a home can feel complicated. With so many different options when it comes to mortgages, it’s tough to know what you qualify for, and where to even start. And it’s even more difficult to figure out what documents you need to get going.

The two most popular loan options are conventional and FHA mortgages and both are great options for financing your home each with their pros and cons.

FHA Vs. Conventional

Access to either loan depends on your financial profile and needs. Both types may be used for home purchases but they’re different in several ways. Conventional mortgages may be backed by several different providers and FHA loans are back and insured by the Federal Housing Administration.

FHA loans tend to be tailored toward those who have poor credit history and are low to moderate-income borrowers. Those seeking financing and who have little savings also benefit as the down payment requirements are lower for FHA loans.

With the lower down payments and lower minimum FICO’s, this loan program is ideal for those who would otherwise not qualify for mortgage products.

Conventional mortgages are great for those who have less debt and have more saved. They’re also more difficult to qualify for and have higher down payment minimums. These loans are not backed by the government and are offered by private lenders.

More On FHA Loans

FHA loans may be used for the purchase or refinance of single-family homes, multi family homes up to four units, condos, and some mobile homes. Some FHA loan types may be used for new construction or for renovation purposes.

With federal backing, lenders tend to offer FHA loans with more favorable terms.

Qualifying for an FHA loan tends to be more accessible. Under FHA guidelines, you can borrow up to 96.5% meaning less down payment is required to originate the loan. Credit scores as low as 580 may qualify as well. This tends to be a bare minimum and a bit of an exception, as most lenders like to see at least a 620 for approval.

More On Conventional Loans

These mortgages aren’t backed by government entities. As such, these loans tend to be riskier for lenders as there’s no insurance on them falling through. This also makes these types of loans more difficult to qualify for and lenders will extend approvals to those with the strongest financial profiles. Down payments tend to be higher and range from 3 – 40%, depending on the specific product.

Conventional loans are considered conforming or nonconforming. Conforming loans follow standards set by Fannie Mae and Freddie Mac. Nonconforming options don’t follow these standards. Nonconforming options may have special pricing or cost more as they don’t conform to one of the larger mortgage backers.

Both options are great, but the best course of action is to speak to your mortgage consultant. They’ll have better context on what you qualify for and which option saves you money and gets you into your new home. There are also several products within each type of loan to consider and you may qualify for some and not others.

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