FHA v. conventional, which is right for you?
Nations Lending offers a wide variety of products to help our clients and give them options. One basic segregation in the market today is between conventional loans, normally associated with Freddie Mac and Fannie Mae, and programs offered by the Federal Housing Administration (FHA). It is good to know the differences.
Conventional programs generally are tailored to borrowers who have well-established credit scores, solid assets, and steady income. As such, these loans have higher barriers to entry than the FHA-backed options. Typically, you need at least a 620-credit score and ideally a 20% down payment, although you can put down as little as 5%, any down payment under 20% will requires 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.)
Most 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 your potential home loan) with your income. 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.
But Nations Lending also offers FHA loans which are great for first-time buyers or people without sterling credit or much money. 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.
To qualify for an FHA loan, you need at least a 3.5% down payment and a credit score of 580. 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%. These loans also have looser debt-to-income requirements of up to 50%. For example, if your monthly income is $5,000, your payments for your mortgage and other debts should not exceed $2,500.
FHA loans have a few disadvantages. For one, they’re usually capped at $417,000 (in certain high-cost areas where Nations Lending operates, the limit is $625,000). Because the federal government insures these loans, you must 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).
Nations Lending’s loan officers are well-versed in both programs, and their nuances, so be sure to ask us!