A conventional loan is often better if you have good or excellent credit because your mortgage rate and private mortgage insurance (PMI) costs will decrease. 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.
A lower credit score means more risk for your lender. Because of that, they'll charge you more to cover that risk, especially since a conventional loan doesn't have a government agency as a safety net. Once your score dips below 680, you could find that government-backed options offer more competitive rates.
Benefits of a Conventional Loan
Conventional mortgages are often the best choice for borrowers who have excellent credit and a down payment of at least 20 percent. These loans can be used to buy a primary home, second home or investment property, unlike FHA or VA loans, which may only be used for a primary home.
These loans are perfect for borrowers with a strong credit history and the funds for a more substantial down payment. Conventional loans offer the ability to avoid the costs of mortgage insurance while also giving borrowers the option of fixed or adjustable rates.
A major benefit of a conventional loan is that the buyer often has higher credit ratings and more capital available for a down payment than with an FHA loan. On the other hand, FHA loans may be attractive to some sellers since they only require a small downpayment and have traditionally lower closing costs.
A lot of first-time homebuyers think they need a 20% down payment to qualify for a conventional loan. That's simply not true. Conventional loan down payment requirements are as low as 3%. That's only $9,000 down for a $300,000 home, or $6,000 down for a $200,000 home.
An FHA loan may be a better option if you have a lower credit score, a higher DTI ratio, or less money saved for a down payment. On the other hand, a conventional loan may work better if your finances are sound and you can qualify for favorable loan terms.
It's easier to qualify for a conventional loan than many first-time home buyers expect. You'll need a minimum credit score of 620 as well as two consecutive years of stable income and employment.
The type of mortgage being granted also plays a role. According to the ICE Mortgage data, conventional loans move slightly faster (43 days) than FHA loans (45 days), for example. Tack on the 20 days on market before that point, and the home sale would take around two months to complete, from listing to closing.
Low monthly payments: Assuming identical principle balances, a 30-year fixed-rate mortgage offers the lowest monthly payment among traditional fixed-rate loans. Flexibility with payments: The lower payment will allow you more flexibility if you run into financial trouble — a layoff or a prolonged illness, for instance.
Reasons your mortgage application may be denied include a dip in your credit score, increased debt, paperwork errors, a low home appraisal and unverified cash deposits.
Conventional loan closing costs: Typically, you'll pay between 2% and 5% of the price of the home at closing with a Conventional loan. FHA loan closing costs: According to the U.S. Department of Housing and Urban Development, FHA loan closing costs average between 3% and 4% of the purchase price of the home.
A conventional loan refinance can be obtained with as little as 5% equity, but will require mortgage insurance if you have less than 20% equity, or 80% loan-to-value (LTV).
While conventional loans allow you to make a slightly smaller down payment of 3%, you must have a credit score of at least 620 to qualify. When you're deciding between a conventional loan versus an FHA loan, it's important to consider the cost of mortgage insurance.
What income is required for a 200k mortgage? To be approved for a $200,000 mortgage with a minimum down payment of 3.5 percent, you will need an approximate income of $62,000 annually.
However, these loans aren't protected by any government agency backing and don't receive government funds in the case of foreclosure. Therefore, it's often a bit tougher to qualify for them. Here's a closer look at the basic guidelines for most conventional loans.
With a $45,000 annual salary, you could potentially afford a house priced between $135,000 to $180,000, depending on your financial situation, credit score, and current market conditions. However, this range can vary significantly based on several factors we'll discuss.
Sellers often prefer conventional buyers because of their own financial views. Because a conventional loan typically requires higher credit and more money down, sellers often deem these reasons as a lower risk to default and traits of a trustworthy buyer.
If the title of this article didn't give it away, the minimum down payment you can make for a conventional loan is 3%. Most lenders add private mortgage insurance (PMI) fees to your monthly mortgage payments when your down payment is less than 20%, but that hasn't deterred most Americans.
Mortgage insurance protects lenders against losses if you're unable to make your payments and default on your loan. FHA loan mortgage insurance is generally more expensive than conventional mortgage insurance because FHA lenders take on more risk approving loans to lower-credit-score borrowers.
The short answer is yes. A thorough appraisal conducted by a licensed appraiser is almost always required for home loans in California. This is true for conventional, FHA, and VA loans.
In general, you'll need to move into the property within 60 days of closing. Additionally, you'll need to live in the property for at least 12 months to qualify as an owner-occupant with most lenders. In contrast, you could obtain financing as an absentee owner.