Introduction
Whether you're buying your first home or looking to refinance, one of the biggest questions you'll likely face is whether to apply for a traditional mortgage loan or an FHA loan. Both options have their pros and cons, and the answer to which one is harder to obtain isn't necessarily cut and dried.
What is a conventional loan?
A conventional loan is a mortgage that's not backed by a government agency. Conventional loans typically require a higher credit score and down payment than FHA loans. Banks, credit unions, and other lenders offer conventional loans with fixed or adjustable interest rates.
What is an FHA loan?
An FHA loan is a government-backed mortgage that's insured by the Federal Housing Administration. FHA loans typically require a lower credit score and down payment than conventional loans. FHA loans are designed to help first-time homebuyers and those with lower incomes afford a home.
Credit Score
Your credit score is one of the most important factors in determining whether you qualify for a mortgage loan and what interest rate you'll pay. With a conventional loan, you'll typically need a credit score of at least 620 to qualify. With an FHA loan, you can qualify with a credit score as low as 500, but you'll need to make a down payment of at least 10%. If your credit score is between 500 and 579, you'll need a 10% down payment and a minimum 90% loan-to-value ratio.
Down Payment
The down payment is another critical factor in obtaining a mortgage loan. With a conventional loan, you'll typically need a down payment of at least 5% to 20% of the home's purchase price, depending on the lender's requirements. With an FHA loan, you'll need a down payment of at least 3.5% of the home's purchase price.
Debt-to-Income Ratio
Your debt-to-income ratio is the amount of your monthly debt payments divided by your monthly income. With a conventional loan, lenders typically want to see a debt-to-income ratio of no more than 45%. With an FHA loan, you can have a debt-to-income ratio of up to 50%.
Interest Rates
Interest rates are another factor to consider when choosing between a conventional loan and an FHA loan. Conventional loans typically offer lower interest rates than FHA loans, but the interest rate you qualify for will depend on your credit score, down payment, and other factors.
Mortgage Insurance
Mortgage insurance is an additional cost that you'll need to factor into your monthly mortgage payment. With a conventional loan, you'll need to pay private mortgage insurance (PMI) if you make a down payment of less than 20%. With an FHA loan, you'll need to pay mortgage insurance premiums (MIP) for the life of the loan, regardless of your down payment or equity in the home.
Applying for a Mortgage Loan
Whether you're applying for a conventional loan or an FHA loan, the application process is similar. You'll need to provide personal information, employment history, income and tax documents, and other financial information to the lender. The lender will also run a credit check and verify your employment and income.
Conclusion
In conclusion, whether it's harder to get a conventional loan or an FHA loan depends on your individual financial situation. Both options have their pros and cons, and the best option for you will depend on your credit score, down payment, debt-to-income ratio, and other factors. At Mortgage Brokers Pro , our experienced mortgage professionals can help you determine which type of loan is right for you and guide you through the application process to make your dream of homeownership a reality.