With both types of loans, the lender sets the interest rate, determined primarily by your credit score. FHA loans sometimes have more favorable interest rates than conventional loans — but the difference is often offset by the greater number of fees, including the MIP charges, that they have.
A conventional loan is often better if you have good or excellent credit because your mortgage rate and PMI costs will go down. But an FHA loan can be perfect if your credit score is in the high-500s or low-600s. For lower-credit borrowers, FHA is often the cheaper option.
“Conventional loans have higher minimum requirements than FHA and require a larger down payment,” Yates said. “Sellers prefer a buyer with conventional financing over FHA financing because they feel the buyer is in a better financial position.”
There are drawbacks to conventional loans, the main one being that you'll typically need stronger finances to qualify. Conventional loans usually have larger down payment requirements and you'll need a higher credit score compared to government-backed mortgages.
The above notwithstanding, FHA and conventional appraisals, in their basic valuation methodology, are generally the same.
Whether you're interested in a listing or touring an open house, here's a list of things buyers can look for that may be considered red flags to an FHA appraiser: Missing handrails. Cracked windows. Termite damage.
You're more likely to get a “clean” appraisal with no work orders by using a conventional loan. But that doesn't mean any home will qualify for conventional financing. All appraisers must look for safety issues as well as items that may make the home hard to sell on the open market if the lender ever had to foreclose.
Conventional loans can require less paperwork and can be obtained more quickly than government-insured loans. Mortgage lenders can approve conventional loans without the typical delays incurred with FHA or government-backed loans.
FHA Loan: Cons
Here are some FHA home loan disadvantages: An extra cost – an upfront mortgage insurance premium (MIP) of 2.25% of the loan's value. The MIP must either be paid in cash when you get the loan or rolled into the life of the loan. Home price qualifying maximums are set by FHA.
FHA loans allow lower credit scores and require less elapsed time for major credit problems. Conventional loans, however, may require less paperwork and offer better options to avoid costly mortgage insurance premiums.
Some reasons a seller might refuse an FHA loan include misconceptions about longer closing times, stricter property requirements, or the belief that FHA borrowers are riskier.
Yes, you can refinance out of an FHA loan as long as you qualify for a conventional loan with a credit score of 620 or higher and have 5% – 25% equity in your home. If you have 20% equity, you may also be able to remove your mortgage insurance and lower your monthly payment in the process.
In most cases, if your name is on the title and you've paid on your current mortgage for at least six months, you'll be able to refinance with a conventional loan. This is common for borrowers with current conventional or VA loans.
Most lenders offer conventional loans with PMI for down payments ranging from 5 percent to 15 percent. Some lenders may offer conventional loans with 3 percent down payments. A Federal Housing Administration (FHA) loan. FHA loans are available with a down payment of 3.5 percent or higher.
Down payment: While 20 percent down is the standard, many fixed-rate conventional loans for a primary residence allow for a down payment as small as 3 percent or 5 percent. Private mortgage insurance (PMI): If you put down less than 20 percent, you'll have to pay PMI, an additional fee added to your payments.
Because FHA closing costs include the upfront MIP, an FHA loan can have average closing costs on the higher end of the typical 3% – 6% range. That doesn't diminish in any way the value of getting an FHA mortgage, with its low down payment, lower interest rates and flexible underwriting.
You won't be able to avoid mortgage insurance: Everyone pays upfront mortgage insurance premiums with an FHA loan. For annual MIP, if you put down less than 10 percent, you'll pay it for the life of the loan. If you put down at least 10 percent, you'll pay annual MIP for 11 years, or until you refinance or sell.
If you put 20% down on an FHA loan, you would pay a lower annual mortgage insurance premium. The premium requirement would also stop after 11 years. However, if you have 20% to put down and your credit score is 620 or higher, you may want to pursue a conventional loan instead.
If you have a credit score of 700 or higher, a debt-to-income ratio of 35% or lower, and a 20% down payment for your loan, a conventional mortgage may be your best bet. If your credit score is lower than 640 or you can't put 20% down, you may want to consider an FHA or USDA loan instead.
Conventional loans are often the best option for borrowers with strong credit who can contribute a down payment of at least 3%, or perhaps quite a bit more. Find out what conventional means in the mortgage industry, and whether it might be the right type of home loan for you.
Because the government doesn't cover their potential losses, conventional lenders impose higher financial standards on borrowers who want to take out a conventional loan than they do on borrowers who want to take out a government-backed loan.
Federal Housing Administration loans: 14.4% denial rate. Jumbo loans: 17.8% denial rate. Conventional conforming loans: 7.6% denial rate. Refinance loans: 24.7% denial rate.
How often does an underwriter deny a loan? A mortgage underwriter typically denies about 1 in 10 mortgage loan applications. A mortgage loan application can be denied for many reasons, including a borrower's low credit score, recent employment change or high debt-to-income ratio.
Home appraisals will never be 100% objective. After all, the appraiser is a human with their own biases and, oftentimes, incomplete sales data. That said, most appraisals are in line with the selling price. On average, only one in 10 home appraisals come in low, but this can vary from region to region.