February 17th, 2018 8:58 AM by Jackie A. Graves
FHA versus conventional loan: If you need a mortgage to buy a house, you may find yourself
weighing these two options. What's the difference, and which one is right for
the majority of home buyers might assume they should get a
conventional home loan, about 40% end up with FHA loans, which are insured
by the Federal Housing Administration. To help you decide
whether an FHA or conventional loan is better for your circumstances,
here's more information about each, including their distinct advantages to
you as a home buyer as well as what you'll need to qualify (which may
vary by lender).
Minimum down payment: 5% to 20%
debt-to-income ratio: 43%
Conventional lenders look for borrowers who
have well-established credit scores, solid assets, and steady income, says Todd Sheinin, mortgage lender
and chief operating officer at Homespire Mortgage in Gaithersburg, MD. As such,
these loans have higher barriers to entry than the FHA-backed options.
You'd better have your A-game on!
Typically, you need at least a 620 credit score and ideally a
20% down payment, although you can put down as little as 5% if you so wish—just
know that on any down payment under 20%, you’ll have to pay private mortgage
insurance, an extra monthly fee meant to mitigate the risk to the
lender that you might default on your loan. (PMI ranges from about 0.3% to
1.15% of your home loan.)
conventional loans also require a maximum 43% debt-to-income ratio, which compares how much money you owe
(on student loans, credit cards, car loans, and—hopefully soon—a home
loan) with your income. So for instance, if your household take-home
income amounts to $5,000 per month, that would mean you should spend
no more than $2,150 per month on your mortgage and other debts.
Minimum down payment: 3.5%
credit score: 580
debt-to-income ratio: 50%
loans are great for first-time buyers or people without sterling
credit or much money. Created by the Federal Housing Administration, these
loans are insured by this government agency, so that guarantees
that lenders won’t lose their money if borrowers default
on their mortgage. In short, it allows lenders to take on riskier
borrowers, while also helping hopeful home buyers in less-than-ideal
circumstances achieve the dream of homeownership.
qualify for an FHA loan, you need at least a 3.5% down payment and a credit
score of 580, says Tim Lucas, editor
at MyMortgageInsider.com. Applicants with lower credit scores (e.g.,
500) may not be out of the running entirely, but must cough up a larger
down payment of at least 10%.
loans also have looser debt-to-income requirements of up to 50%. So for
example, if your monthly income is $5,000, your payments for your mortgage and
other debts should not exceed $2,500.
loans may be a boon to home buyers (particularly first-timers) who might not
qualify for a loan otherwise, but they do have a few disadvantages. For
one, they’re usually capped at $417,000 (in certain high-cost areas, the limit
is $625,000)—meaning you may have limited buying power. Also, because the
federal government insures these loans, you have to pay an upfront mortgage
insurance premium (currently, the fee is about 1.75%) and annual mortgage
insurance (typically 0.85% of the borrowed loan amount), which remains
throughout the life of the loan (or until you can refinance the loan into a conventional mortgage).
if you have the means and qualifications to afford a conventional loan, this is
the one to opt for, since it has fewer restrictions (and is faster to get).
However, if you're a less-than-ideal home buyer with a mediocre credit score,
down payment, or income, then an FHA loan may be the best—or only—avenue
open to you.
with your lender to know where you stand, or plug your numbers into
an online home affordability calculator to get a ballpark idea
of whether an FHA or conventional loan is right for you.
more smart financial news and advice, head over to MarketWatch.
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