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The Top 6 Ways FHA Home Loans Differ from Conventional Mortgages

Posted by Elizabeth Dennis on January 20, 2010 | No Comments

Maximum Purchase Price

At the time of this writing, the maximum purchase price for conforming conventional loan ranges from $417,000 to $729,000.  This amount is updated yearly and is dependent upon the county in which the home is located.   Any loan above that amount is considered a jumbo or non-comforming conventional loan.

The maximum purchase price varies from state-to-state for an FHA loan.  At the time of this writing, the range is $271,050 – $729,750 (again, depending on the home’s location).  Typically, FHA loan limits are approximately half of what can be found in the conventional loan market.

Minimum Down Payment

Down payments range from 0 to 20% for conventional loans.   The larger your down payment, the lower your interest rate and mortgage insurance costs.  Higher credit scores and larger cash reserves are required for lower down payments.

FHA loans are quite flexible with regards to down payments.  Generally, the minimum amount down is 3% of the home’s sale price.  This 3% is made up of 2.25% down payment and .75% paid toward FHA allowable closing costs.  This 3% investment can be in the form of a gift from your family, church, or government agency.

Co-Borrowers

Conventional loans require that the owner/occupant of the home qualify on their own without help from a non-occupant.  FHA loans allow for the income of non-occupants to be used when qualifying for the loan.

Debt-to-Income Ratio

For a conventional loan, your PITI (mortgage payment) should not exceed 33% of your gross monthly income.  Combined debts (PITI and other recurring debt) should not exceed 41%.  View our previous post about PITI.

Your PITI (your mortgage payment) on a FHA loan should not exceed 29% of your gross monthly income.  Combined debts should not exceed 41%.  View our detailed information about debt-to-income ratios and how to calculate your own.

Mortgage Insurance

“Private Mortgage Insurance” (PMI) is mortgage insurance for conventional loans.  The rates vary and mostly depend on the amount of your down payment.  If you pay 20% down or more down, you are not required to carry PMI.

Mortgage insurance for FHA loans is called “Mortgage Insurance Premium” (MIP).  Much like the conventional loan, your down payment amount will determine your required mortgage insurance.  MIP is required for all FHA loans though MIP rates are typically lower than PMI rates for conventional loans with a similar 3% down payment.

Credit Score and Credit Rating

A conventional loan generally requires a higher credit score than an FHA loan.  The minimum score will vary depending on your down payment, income and cash reserves.  For a conventional loan, it is best to have a credit score of at least 620.  View Newbuyer’s advice on how to view your credit rating and score.

There are no stated minimums for FHA loans, but in most cases lenders will require a credit score of greater than 600 to get an FHA loan.  The higher your score; the lower your interest rate.