Should you get an FHA loan or conventional loan? There’s no single answer that works for every borrower. Instead, you’ll need to consider a few of the major factors that go into your ability to qualify for these loans.
FHA vs Conventional – How Big is Your Down Payment?
One of the biggest hurdles that new homeowners struggle with is saving up the down payment. Even if you’re buying a modestly-priced home, you’ll need to save up thousands of dollars.
An FHA loan has lighter requirements, typically requiring only 3.5% down. So if you buy a house that costs $250,000, you’d need to put down $8,750.
Understandably that can take a while to save up. But the alternative – a conventional mortgage – would need a 20% down payment. That means you’d need $50,000 saved up!
That’s one reason why a lot of first-time homebuyers end up going with an FHA loan. That way they can start building equity and hopefully get a conventional loan for their next mortgage.
FHA Loan vs Conventional – What’s Your Debt-to-Income Ratio?
Another factor to qualify for these loans is your debt-to-income (DTI) ratio. Put simply, this ratio refers to how much revolving debt you have vs. your gross income.
As an example, let’s say your monthly bills come out to $3,000 and you make $5,000 a month. That means your DTI would be $3,000/$5,000 = 60%.
When you’re trying to qualify for an FHA loan, the lender typically wants to see a DTI of less than 50%. When they calculate that, they’re factoring in your new mortgage + your existing liabilities.
Reaching that goal of under 50% may seem difficult, but again you have to consider the alternative. What does a lender want to see before extending an offer for a conventional loan? The most common answer is a maximum DTI of 43%.
If you find yourself in the situation of having a DTI that’s too high for the type of loan you want, your best bet is to either
- Improve your ratio by making more money, paying off debt or (preferably) both
- Consider getting a smaller loan so your DTI stays under the limit you need
Conventional vs FHA Mortgage- How’s Your Credit Score?
Last but definitely not least is your credit score. Just like with other factors, lenders have different expectations here for FHA vs. conventional loans.
Typically to get an FHA loan you should have a score of at least 580. If your score is less than 580 but at least 500, you may be able to get a loan if you can put at least 10% down on the house.
Conventional loans usually require a credit score of at least 620. It may not seem like a big jump from 580 to 620, but sometimes it can take a while to build up your credit score.
If you are in that situation of needing to boost your score, the best advice we can give you is to make sure you pay your bills on time and lower your revolving debt.
Which loan are you shooting for? Both FHA and conventional loans are great, but each person’s specific situation leads to going with one route over the other. For some guidance in your decision, send an email at email@example.com. We look forward to helping you figure this out.