Is Conventional Loan Better Than FHA? - Insurance Noon (2024)

Mortgages are a popular way of obtaining loans on a house that you like, with 4.1 million Americans who have a mortgage loan. Statistics prove that there is a mortgage debt of $9.78 trillion in 2020 in the United States.

With so many people opting for mortgage loans, is the process easy and accessible to everyone? What are the different types of mortgage loans and which ones are better? What is a conventional loan definition and how is it better than FHA loans? Read below to find out all answers to your questions!

Conventional Loan Vs FHA Loan

A conventional loan is a type of mortgage loan that is backed by private lenders, or two government sponsored organizations: Fannie Mae and Freddie Mac. Conventional loans are NOT backed by the federal government, which is why the lending process is a lot stricter and the interest rates are high. Even though fixed, the high rate of interest makes it harder for people to qualify for the loan.

An FHA (Federal Housing Administration) loan is the one that is backed by the federal government, requires a down payment of minimum 3.5%, and people with a low credit score also have a chance to qualify for the loan.

Here is a comparison chart of conventional loan vs FHA loans that will make it easier to understand the minimum requirements for each type.

Note: Sample rates have been extracted online, courtesy of TheMortgageReports.

Conventional Loan Requirements

Credit Score: The first most important requirement for a conventional loan is the credit score. This type of mortgage loan is handed out to people with a minimum credit score of 620, but if your score is 700 or above that, it strengthens your chance of approval. A good credit score will also ensure that you have a low amount of interest on your loan.

Downpayment: The minimum down payment percentage is 3%, but it is usually 20% because private lenders take a bigger risk. The amount was reduced to compete with the 3.5% issued by FHA loans. The bigger the down payment, better the loan amount.

Debt-to-income ratio: This is the sum of your monthly debt payments, such as credit cards and loan payments, compared to your monthly income. Ideally, the debt-to-income ratio should be around 36% and no more than 43%. In other words, you should spend less than 36% of your monthly income on debt payments.

Documents: Once all of these prerequisites are done, the next step is submitting all documents. The lender will ask for your credit reports, tax history, and various other required records. Make sure all of these are up-to-date and ready to be submitted to save time.

Conventional Loan Calculator

There are plenty of online calculators available on the internet, such as this conventional loan calculator.

It is vital to have an idea of how much loan you can borrow and how much you will have to pay -with interest- over time. You just have to put in all the basic values such as the total loan amount, number of years, interest rate etc. The calculator runs the numbers and gives you a close estimate of what you should be expecting.

Fha Loan Application

Once you’ve decided that you want to opt for an FHA loan, here are some of the requirements that are part of the FHA loan application process. First, you need to gather all the documents at your end:

• W-2 forms for the last two years
• Your last two pay stubs
• Two years of tax returns
• Bank statements
• Statements on investment securities and earnings
• Listing of all debts and minimum monthly payments for each
• Names and addresses of employers over the past two years
• Pension, Social Security or disability income, if applicable
• If self-employed, two years of profit and loss statements

When you’re done submitting all your financial statements as part of the FHA loan, the lender will look through these and verify them. If the case looks genuine and authentic, they will move forward with the application. They will look at your credit score, DTI, bank statements, how much downpayment you can make etc. Once you’re approved for the mortgage, you can talk about your specific requirements and obtain the loan accordingly.

Mortgage Rates 2020

The current mortgage rates have dropped significantly, on 10th September 2020, from 3.93% to 2.86% in the last week only. Borrowers with a 30-year fixed-rate mortgage of $300,000 with today’s interest rate of 2.86% will pay $1,242.27 per month in principal and interest (taxes and fees not included). The total interest paid over the life of the loan will be $147,218.42. That same mortgage taken out a year ago would cost an additional $41,374.27 in interest over the life of the loan.

Here is how the rate has changed on a weekly basis in the last couple of months:

Note: Current sample rates have been extracted online, courtesy of MyMortgageInsider

Conclusion

For mortgages, loans today have become accessible to most Americans, especially when they have a good credit rating or enough money to make a big down payment. However, with every lender or bank that you go to obtain either a conventional or an FHA loan, the rates will vary. This means that it is very important to shop around to find the best rates possible.

Hiring an agent or consulting with an expert before you make a decision is also very important. Make sure you know all the latest trends and you’ve done enough research on the loans and the mortgage market too. Pick whatever loan suits you best and whichever loan you’re eligible for.