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FHA Vs Conventional Loans: Which Is the Best Mortgage Option For You?

Buying a home is one of the biggest financial decisions most of us will ever make, and one of the first major choices you’ll need to face is deciding which type of mortgage to get.

If you’re a first time or low income home buyer, you may be considering an FHA loan through the Federal Housing Administration, or maybe a conventional loan makes more sense for you.

Both FHA vs conventional loans each have pros and cons. We will break it all down for you so you can decide if FHA or conventional is best for you.

Are you trying to figure out which home loan is right for you? Need to save money for closing costs? We can help you save thousands with our realtor rebate program. Fill out the form below to learn more!

What Is a FHA Loan?

As the name implies, FHA loans are insured by the Federal Housing Administration, which is part of the U.S. Department of Housing and Urban Development (HUD). 

Here’s the deal with FHA loans – because the FHA insures a portion of the loan for the lender, borrowers are able to get more favorable terms. That includes a lower down payment and more relaxed credit requirements compared to conventional mortgages.

This has made FHA loans very popular, especially for first time homebuyers who might not have the best credit scores and little in savings. You may even be able to qualify for moving assistance programs.

To qualify for an FHA loan vs conventional, you’ll generally need the following:

  • A credit score of at least 500 (the higher, the better to avoid huge down payments)
  • Steady employment and income
  • A debt to income (DTI) ratio below 43 percent

While the credit score and DTI requirements are definitely more lenient than conventional loans, FHA borrowers still need to prove that they can still reasonably afford the mortgage payments.

What Is a Conventional Loan?

A conventional mortgage is a home loan that isn’t backed by any government agency. Instead, it follows guidelines set by Fannie Mae and Freddie Mac, the two major private companies that buy mortgages from lenders.

Because conventional loans vs FHA loans don’t have government insurance protecting the lender, they typically have stricter credit and income requirements:

  • Minimum credit score around 620
  • DTI ratio under 43-50 percent in most cases
  • Down payment of at least 3 percent for many lenders

The higher your credit score, the lower your interest rate and down payment will be. For borrowers with great credit, a credit score of 700 or more, and enough asserts, they can usually make a very low down payment, like 3-5 percent. 

Key Differences Between FHA and Conventional Loans

These are the key differences between FHA vs conventional loans.:

Down Payment Requirements

Let’s start with down payments, which are a huge factor for most homebuyers. FHA loans allow down payments as low as 3.5 percent for borrowers with a credit score of 580 or higher. For the credit scores between 500 and 579, you need to put down a minimum of 10 percent.

For conventional mortgages vs FHA, the down payment can be 3 percent or higher depending on your credit score and the lender’s specific program. You can avoid private mortgage insurance by putting down 20 percent, but that’s something you need to plan for when saving for a house

Credit Score Requirements 

While we already covered some of this, there’s more to it that you should know. FHA loans tend to have lower credit score requirements compared to conventional mortgages. A score of 580 is just fine for the minimum 3.5 percent down payment on an FHA loan.

Most conventional vs FHA lenders want to see a credit score of 620 or higher. If it’s below that, they might charge higher interest rates or require a larger down payment to offset any risk. Being careful with your credit could be something to add to your mortgage checklist when preparing to buy a home.

Loan Limits

Both FHA and conventional loans have limits on how much you can borrow, which can vary based on your county. 

As of 2024, the FHA loan limits for a single family home range from a floor of $498,257 to a ceiling of $1,149,825. 

The conventional loan limits range from a baseline conforming loan limit of $726,200 to a maximum of $1,089,300 in the highest cost areas.

Mortgage Insurance Premiums

This is a key difference – with an FHA loan, you’ll pay upfront and annual mortgage insurance premiums (MIP) over the life of the loan if you put less than 10 percent down.

The upfront MIP is 1.75 percent of the base loan amount, while annual MIP ranges from 0.45 percent to 1.05 percent of the remaining balance.

Conventional loan borrowers can avoid mortgage insurance altogether by putting 20 percent down. If you don’t, you’ll have to pay private mortgage insurance (PMI) of around 0.5 percent to 1 percent of the loan amount annually.

But you can cancel PMI once you reach 20 percent equity in the home.

Property Requirements

For an FHA loan, the home must meet HUD’s minimum property requirements and standards. An appraiser will inspect it thoroughly, looking for any potential defects or hazards.

Conventional mortgages don’t have federally mandated property standards for the home itself, but an appraisal is still required to confirm that the value matches the purchase price.

FHA vs Conventional Rates

Interest rates are often slightly lower for FHA loans compared to conventional ones, all else being equal. The difference is pretty small, maybe 0.25 percent or so on average.

Your actual rate will depend on your credit score, loan amount, debt ratios, and the overall mortgage market at the time. 

In general though, FHA rates give conventional rates a run for their money.

How the ARC Realtor Rebate Can Help

One major way you can save money when buying a home is through the ARC Realtor Rebate program. You can be eligible for a generous cash rebate worth thousands of dollars after closing on your purchase.

Here’s how the ARC Realtor Rebate works:

  1. Find a participating agent in ARC’s huge realtor network. You can use almost any real estate agent you want, as long as they are approved for the program.
  2. Register for the rebate program by following this link and filling out a quick online form.
  3. Work with your ARC- affiliated agent to complete your home purchase transaction. They’ll guide you through the whole process while providing expert assistance.
  4. After closing, you’ll receive a cash rebate based on the purchase price of the home. The rebate amount is calculated as a percentage of the commission earned by your agent.

The rebate amounts can be substantial – for a $500,000 home purchase, you’d get $6,200 cash back. The higher the price, the larger the rebate, so it really adds up for expensive properties,

Your rebate can be used for literally anything – covering closing costs, moving expenses, renovations, you name it. It’s basically free money that gives you an excellent head start as a new homeowner and can help you save money.

With ARC, you have more flexibility and can earn up to $9,500 back on homes over $2 million. For properties above that price point, you’ll need to contact ARC directly regarding the rebate amount.

FHA Vs Conventional Loan: FAQs

What credit score do you need for a conventional loan?

Most conventional mortgage lenders require a minimum credit score of 620, but some may go down to 580 for borrowers willing to make a larger 10 percent down payment. Credit scores of above 700 will qualify for the best rates and terms.

Can you get a conventional loan with 5 percent down?

Yes, conventional loans allow down payments as low as 3 percent in many cases. Putting down less than 20 percent will require paying PMI until you reach 20 percent equity in the home.

Is a conventional loan better than FHA?

There are some advantages of getting a conventional loan vs FHA:

  • Avoiding mortgage insurance with at least a 20 percent down payment 
  • You can get higher loan limits in some areas
  • There are more lenient property standards than FHA
  • You have the option to cancel PMI once you reach 20 percent equity

Final Thoughts

Whether you pursue an FHA vs conventional loan, buying a home is an exciting, but complicated process. Partnering with the right real estate agents can make it much smoother and more rewarding.

At ARC Relocation, we can provide expert guidance throughout your entire relocation journey, plus we offer our Realtor Rebate Program. 

Our team of experienced relocation consultants can assist with everything from helping you get pre-approved for your dream home to negotiating the best deal and coordinating your move logistics.

Contact ARC Relocation today to get started.

Contact ARC Today for More Expert Relocation Advice and Guidance!

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