FHA vs Conventional Financing

Learn To Choose The Right Loan For You

In this article i will go into details of FHA vs Conventional Financing from a mortgage loan perspective.  Between these 2 loan programs, this covers a large majority of the loans approved and funded every year.  FHA Loans have their guidelines written by the Federal Housing Administration which can be found in the FHA Handbook 4000.1 and these loans are insured by the government and paid with premiums derived from the monthly payment.  Conventional Loans which can either be Fannie Mae or Freddie Mac depending on the type of loan needed have their guidelines created by the same entities.  In the case of Conventional Loans these loans are insured by insurance that is paid for within the terms of the loan.

Just because FHA Loans are more popular than Conventional Loans it is wise for you to compare FHA vs Conventional Financing to determine the right loan for you.  As a borrower you should be fully informed about any loan programs you are interested in and working with myself, Nick Ferrante NMLS# 1110570, will give you access to a mortgage professional who can go over all options with you so that you don’t make a mistake.  Since FHA Loans are the most popular loan, it is fitting that we will go into their guidelines first in our FHA vs Conventional Financing comparisons.

FHA vs Conventional Financing: FHA Loan Guidelines

The FHA Loan piece of the FHA vs Conventional Financing equation is one that will show you just how relaxed the guidelines for this loan are. 

• Minimum FICO credit score of 500 is needed for a loan
• Down Payment as low as 3.5% for borrowers with a FICO credit score of 580+ and a 10% down payment requirement for borrowers with w FICO of 500-579
• Debt to Income ratio of 56.9% for those borrowers with a 620+ FICO credit score and a 43% debt to income ratio for borrowers with a FICO credit score under 620
• Waiting Periods after derogatory event: Chapter 7 Bankruptcy = 2 years from discharge date, Chapter 13 Bankruptcy = No wait after discharge date and only need 12 months of timely payment if on a repayment plan, Foreclosure = 3 years after sheriff’s sale or from the date the deed is removed from your name
• Collections: Medical Collections are not factored into your debt to income ratio while Non-Medical Collections factor in 5% of their total if the combined amount is over $2,000
• UFMIP or Up-Front Mortgage Insurance Premium is 1.75% of the loan amount and 0.80% annually for the duration of the loan

FHA vs Conventional Financing: Conventional Loan Guidelines

Now we are free to look at the Conventional Loan aspect of the FHA vs Conventional Financing debate and how this loan stacks up to its FHA competitor.

• Minimum FICO credit score of 620 required for a loan
• 3% down payment required for select first-time home buyers or a 5% minimum down payment for all other borrowers.
• Debt to Income ratio is normally capped at 45% and in some cases can go up to 50%.
• Waiting Periods after derogatory events: Chapter 7 Bankruptcy = 4 years after discharge date, Chapter 13 Bankruptcy = 2 years after discharge date, and Foreclosure = 7 years after sheriff’s sale or deed removed from borrower’s name
• PMI or private mortgage insurance is required on the loan until there is at least 20% equity built into the home
• Non-occupant co-borrowers are not allowed by Fannie Mae but can be had for Freddie Mac

As you can see there are pros and cons for each side of the FHA vs Conventional Financing argument.  What it comes down to is what loan fits you the best both in the short-term and the long-term.  There is not a point to get into a loan that has negative effects down the road which is why doing a proper FHA vs Conventional Financing evaluation is key before purchasing a home.  I can help with this and make sure you are making a well-educated decision and should any questions arise, please call me immediately at 630-465-2656 and I can help ASAP.  If you want to get the process started, then please fill out my application here.