Which Is Better: An FHA Loan or a Conventional Loan?

If you plan to only pay 10% or less of the cost of a home as your down payment, then you need to consider more options than just the conventional loan. A down payment that small usually means that your funds are limited and that you are going to be paying on the loan for a while.

You should consider applying for an FHA loan with Mid America Mortgage, Inc., which is a government loan that’s meant for people who have a low credit score or who would not qualify for conventional loans. You can often qualify for both, though, and when that’s the case, you should consider your options and weigh the advantages and disadvantages of them.

The Credit Score Factor

If your credit score is below 740, it is going to start affecting your mortgage rates. If you apply for a loan with a sore lower than that, then you will likely see increased rates over what you could otherwise enjoy.

Once you hit a credit score of 620 or less, then you may not even be eligible for most mortgage loans. Your options may be limited to FHA loans almost entirely at that point. If you are anywhere near a sore of 620, then you need to either look at an FHA loan as a viable option or work to get your credit score higher.

The Total Cost

You will always pay more for the FHA loan in the long run than you would with a conventional loan. That’s because the mortgage insurance is always going to be more with that kind of loan. The advantage to that din of loan, however, is that you don’t pay all that insurance at once. You pay some of it upfront and the interest in monthly payments. In some cases, you may be allowed to make that upfront payment at the end of your loan.

You may still need mortgage insurance with a conventional loan, particularly if you are paying less than 20% down on the house when you buy it.

Your Income

If your income doesn’t meet certain thresholds or if your income-to-debt ratio is too high, you may not be eligible for some conventional mortgage loans. You may not even qualify for an FHA loan in some extreme cases, so this is another area where it benefits you to do some work and make improvements.

Down Payment

A conventional loan is generally requires between 10 and 20% down payment on the house. 20% is encouraged but not required.

For an FHA loan, you only have to pay 3.5% down, if you qualify as low risk. For those who are considered high risk, 10% is required down.

Know that you won’t always have a choice between these two loans, but when you do, it is worth considering both of them. The FHA loan will be cheaper starting out and will give you some lending options that you wouldn’t get from other lenders.