Should you choose an FHA or Conventional loan: Which one is better?
Out of the various types of loans that are available for buying a home, the FHA and conventional mortgages are the two most popular. These loans have some basic differences that are important to understand for potential home buyers in order to plan their purchase correctly.
First and foremost, the credit score requirements for an FHA loan are much more relaxed compared to a conventional mortgage. The minimum credit score required for either an FHA loan or a conventional loan will slightly vary between lenders, but the FHA minimum is typically much lower.
Secondly, conventional mortgages have larger max loan amounts. In fact, the FHA guidelines actually state that the maximum amount that can be loaned on an FHA loan is a percentage of the max amount of a conventional loan in the same area.
Third, the down payment for an FHA loan is 3.5% of the home’s asking price. Furthermore, this money may come in the form of a gift from a relative to the buyer. This cuts down on the amount of cash needed by the borrower. On the other hand, a conventional loan will ask the borrower for a down payment that could be as low as 5% and as high as 20% of the price. The money for the down payment must come from the borrower’s funds and this must be documented.
In general terms, people that have higher credit scores and plan to pay at least 5% down, if not more, would be better served using the conventional mortgage route. Otherwise, an FHA loan will be a good option.
Learn more about the pros and cons of an FHA loan vs Conventional mortgage to see the full comparison.
FHA or Conventional Loan: Which Is Better?