FHA Vs. Conventional Loan

FHA loans and conventional mortgage loan have many differences. The first major difference is the down payment on these loans. FHA loan requires only a down payment of 3% whereas the conventional loans require 5-20% down payment which is really big for many people. FHA loans and conventional mortgage loan have many differences. The first major difference is the down payment on these loans. FHA loan requires only a down payment of 3% whereas the conventional loans require 5-20% down payment which is really big for many people. FHA loan fees and other charges are controlled which means you will not charged more then some set rates whereas in conventional loans a lender can charge you with any kind and number of fee. FHA origination fee is 1% maximum but there is no limit on origination fee for conventional loans. FHA loans have relaxes terms and that's why have larger qualifying ratio. FHA requires that the house you are about to purchase meet their standards of quality where as you can buy any type of house through conventional loans. In FHA a buyer can credit 6% towards borrowers closing cost where as only 3% can be credited in a conventional loan. The insurance premium charged on the FHA loan annually is 0.5% which is a little higher but if compared with conventional loans with small down payments it is quite lower because they charge from 0.55 – 0.98%.

How Much FHA or Conventional Loan Is Affordable

The FHA or conventional mortgage loan that you can afford is calculated by debt to income ratios. You would ask why. Well neither FHA nor conventional lenders want you to get into a position where you cannot pay and you get bankrupt or face foreclosure . This can happen if you buy a house which has monthly payments you cannot afford. So before any one lends you money they check the amount you can afford. Two types of ratios are used to calculate debt to income ratio. First is "mortgage payment expense to effective income" and the second is "total fixed payment to effective income". In the former method the total payment (mortgage principal, interest, insurance, and property taxes) is divided by the gross monthly income and the ratio that is acceptable is 33% for conventional loans and 29% for FHA loans. The latter method adds the mortgage payment and revolving accounts such as auto loan and student loans and divides the sum with your gross monthly income. The ratio acceptable is 36% for the conventional loans and 41% for the FHA loans.

Qualification Criteria for FHA and conventional loans

FHA and conventional loans have their own sets eligibility conditions. FHA loan doesn't require FICO score or minimum monthly income but it does require no delinquent federal debts, 2 year old foreclosure, credit report shouldn't have more then couple of late payment, 2 year old bankruptcy, 2 lines of credit and steady employment. Conventional loans on the other hand require good or excellent credit, large down payment, low debt to income ratio and a stable job rate. Secured loans provide lesser rates because of the security but they still people with bad credit, bankruptcy and low income have a hard time finding good conventional mortgage deal.