DIFFERENCE BETWEEN FHA & CONVENTIONAL
There are substantial differences between government backed FHA loans and Fannie Mae/Freddie Mac conventional loans. Please take a moment to compare the two loan programs.
CREDIT SCORE
FHA » Easier credit score requirements than conventional loans. Get approved with a credit score as little as 560. Also offers a “no score” program. Credit score is not required if applicant is able to provide 3 alternative verifiable credit accounts such as rent, utilities, cell phone, insurance, etc.
CONVENTIONAL » More strict credit score requirements. Credit scores down to 620 but applicants with low scores are scrutinized more. Collections may need to be paid.
DOWN PAYMENT ASSISTANCE
FHA » Down payment assistance is allowed. Gift of equity allowed from family.
CONVENTIONAL » Down payment assistance not allowed in most cases. Gift from family ok.
INCOME
FHA » Has more lenient debt to income requirements. In most cases, this will help you qualify for a larger loan amount. 55% MAX debt to income.
CONVENTIONAL » More strict(45% Debt to Income MAX)
CREDIT HISTORY
FHA » More flexibility regarding past credit, collections and other derogatory credit. Medical collections are mostly disregarded.
CONVENTIONAL » Strict on past collections and must receive automated approval to get approved. Automated approval is based on your income, credit and loan terms.
NO APPRAISAL PROGRAMS
FHA » Ability to streamline your current FHA loan to reduce interest rate or change loan term. This loan does not require any income documentation or verification.
CONVENTIONAL » No streamline but does offer the “Making Home Affordable” program which will allow a homeowner to refinance even if they do not have any equity in their home. Income qualifying is required but an appraisal can be waived in most cases.
MORTGAGE INSURANCE
FHA » Has mandatory monthly and yearly mortgage insurance. Unfortunately this mortgage insurance is for the life of the loan and can never be removed. (EX: $200,000 loan – average up-front MI would be $3,500 and monthly MI would be $225)
CONVENTIONAL » If a homeowner currently has conventional mortgage insurance it may be removed when the homeowner reaches 20% equity. Also, mortgage insurance can all together be avoided with as little as 5% equity on refinances and purchases. Also, no up-front mortgage insurance in most cases.
MORTGAGE RATES
FHA » Rates are usually very competitive. For the most part, rates will be the same for applicants with a 640 credit score or a 720 credit score.
Conventional » Rates will be slightly higher than FHA but the ability to avoid mortgage insurance will give you a lower APR(Annual Percentage Rate. Also, unlike FHA, borrower’s credit score will impact the interest rate.
