But PMI skyrockets for those with lower credit. Mortgage insurance is likely the most complex item to consider for conventional and FHA loan requirements.Ĭonventional private mortgage insurance, or PMI is quite reasonable for those with a 720 credit score or higher. Those looking in high-cost areas or needing a larger loan might choose a conventional loan due to its higher limits.Ĭonventional: 0.5-1.5% of the loan per year, cancelable at 80% loan-to-valueįHA: 1.75% upfront 0.55% per year, non-cancelable Conventional loan limits are higher in most areas of the country.īoth FHA and conventional loan limits go up to $1,149,825 for a 1-unit home in high-cost areas and even higher for properties with 2-4 units. Neither loan has a minimum loan amount, but both impose maximum loan limits. Self-employed applicants will also find FHA more forgiving with more than one but less than two years in business. If you can explain job gaps and frequent changing of employers, you may be approved more easily for FHA versus a conventional loan. However, FHA is more lenient about job gaps, periods of unemployment, seasonal layoffs, and job-switching. This is the power of FHA.īoth conventional and FHA require two years of employment history, and both count time in college coursework toward work history. In the FHA example, the buyer may qualify for the same house as the conventional buyer, even though she has lower income. Here’s an example showing how FHA can get you approved for the same home even with lower income. DTI can be 56% if the rest of the file is strong. However, those with lower incomes, high debt, or buying in a high-cost area might consider FHA. That’s up to $4,500 in debt and housing payments versus a $10,000-per-month income. You can have monthly obligations up to 43%, or sometimes 45%, of your gross income and still qualify. Homebuyers with medium-to-high incomes should have no trouble meeting debt-to-income, or DTI, requirements for a conventional loan. You’ll also pay higher rates and mortgage insurance than FHA when you put 3% down on a conventional loan.įHA is the most flexible program for those wanting a small down payment.īoth programs allow you to use eligible down payment assistance or gift funds to cover the entire cost. For example, Fannie Mae HomeReady requires your income to equal 80% or less of your area’s median, as does Freddie Mac’s Home Possible mortgage. Additionally, you may have to meet income limits. Some conventional 3%-down programs require you to be a first-time homebuyer. However, that 3% minimum comes with strings attached. Technically, conventional loans require just 3% down, slightly beating out FHA in this regard. In fact, some borrowers could be approved with flying colors for an FHA loan, but be denied conventional, even with a 640 or 660 score.Īnother way FHA is more lenient: it allows scores down to 500 if you put 10% down. A complex underwriting algorithm decides whether you meet criteria, and credit score is just one factor.įHA’s algorithm will approve much weaker files than conventional. Mortgage approvals aren’t based on your credit score alone.įor instance, you are not automatically approved for a conventional loan because you have a 620 score. That’s obvious looking at credit score minimums, but there's more to it than that. FHA is more forgiving about credit scores.
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