Knowledge Base
FHA vs. Conventional
For most borrowers looking to purchase a home, FHA or Conventional mortgages will likely be their best option for financing. Here we will outline the basics of FHA loans as well as how to compare FHA vs. Conventional Loans.
What is an FHA loan?
FHA loans are insured by the Federal Housing Administration, part of the US Dept. of Housing and Urban Development or HUD, so that lenders can offer better loan options to borrowers. Their mission is to create affordable mortgage products that drive homeownership, especially for borrowers who would have more difficulty applying otherwise.
Who are FHA Loans Designed to Help?
- Middle- and Lower-Income Borrowers
- First-time homeowners
- Someone who can’t afford a high down payment
- Borrowers with lower credit scores or previous foreclosure/bankruptcy
- Clients looking to make renovations or repairs after purchasing [via FHA 203(k) Loan]
| FHA pros | FHA cons |
| Easier to qualify 500 minimum FICO score Only 3.5% down payments 57% DTI (Debt-to-Income) Shorter wait time requirements after Foreclosure or Bankruptcy | More stringent appraisal requirements A home must pass an inspection by meeting minimum safety and security standards. |
| Lower interest rates (typically) Rates are typically lower with an FHA loan when compared to a conventional loan with the same terms. | Slightly higher payment Because FHA requires additional mortgage insurance (MIP), FHA loans may have a slightly higher monthly mortgage payment than conventional even if the rate is lower. |
| Flat based pricing There are typically no extra pricing adjustments once you qualify. | |
| Streamlined refinance There are little-to-no cost refinance options if rates drop. | |
| Allows borrower to purchase earlier Lower barriers means a borrower can apply sooner; less money lost renting. |
Key Differences of FHA vs. Conventional
| FHA | Conventional | |
| Residence Type | Primary, only | Primary, Seconday, and Investment Properties |
| Down Payment | 3.5% Down (Regardless of income or prior homeowner status) | As little as 3% Down (Only for first-time homeowners, and people below 80% of their area’s median household income ) |
| FICO | 500 minimum FICO* *Clients close to minimum FICO will need strong compensating factors (lower DTI, lower Loan-to Value [LTV], additional assets/reserves) | 620 minimum FICO* *Clients close to minimum FICO will need strong compensating factors (lower DTI, lower Loan-to-Value [LTV], additional assets/reserves) |
| Pricing Adjustments | Flat Based Pricing Clients pay the same costs regardless of credit profile as long as they meet minimum qualifications. | Loan Level Pricing Adjustments Pricing is adjusted based on credit profile. Better qualified clients pay less closing costs ($) for the same interest rate (%) than clients that qualify with a weaker credit profile. |
| DTI | 57% max Debt-to-Income (DTI)* *Clients close to maximum DTI will need strong compensating factors (higher FICO, lower LTV, additional assets/reserves) | 50% max Debt-to-Income (DTI)* *Clients close to maximum DTI will need strong compensating factors (higher FICO, lower LTV, additional assets/reserves) |
| Mortgage Insurance | UFMIP & MIP FHA loans include an Up Front Mortgage Insurance Premium (can be financed into loan amount), and monthly Mortgage Insurance Premiums for life of loan (if < 10% down) or 11 years (if > 10% down). | PMI (if above 80% LTV) Private Mortgage Insurance for loans w/ <20% downpayment. Typically cheaper than MIP, can be dropped once the homeowner reaches 21% equity. |
| Refinancing | Streamlined Refinance If rates drop (0.5% or more),in the future, FHA allows you to refinance for a lower rate at little to no cost. | Full Refi Closing Costs If you refinance in the future, you will have to pay full closing costs again. |
| Renovations | Renovation Loans Homeowners can use FHA 203(k) loan to borrow extra funds for repairs or renovations. | No Renovation Loans Homeowners can only borrow up to 97% of home current value. |
| Derogatory Credit Events Wait Times | Shorter Derogatory Waiting Times Borrowers must wait 3 years after foreclosure, or 2 years after a bankruptcy to apply. | Longer Derogatory Credit Waiting Times Borrowers must wait 7 years after foreclosure, or 4 years after a bankruptcy to apply. |
For more information on FHA loans, check out our blog post about FHA loans below, and feel free to share this link below with your customers!