Many financial “gurus” have perpetuated the idea that FHA loans are bad. This false information has been spread so frequently, people will forgo being a homeowner if an FHA loan is their only option.
It’s time to set the record straight: sometimes an FHA loan is better than a conventional loan. Take a look at these three variables:
Over 62% of Americans believe you need 20% down to buy a house. This isn’t true. Just comparing these two loan programs, we find the minimum down payment for FHA is 3.5%, and for conventional, it is 3%.
This may lead some to believe conventional is best because of the lower down payment, but this isn’t necessarily true either. In reality, your interest rate and payment on a 3% down conventional loan is likely higher. Additionally, the 3% down conventional loan has an income requirement attached. You cannot get a conventional 3% down loan if your income is above a certain level per the county that you live in. As a result, some make too much money to qualify. Conventional loans get an interest rate and payment price break at 5% down. When comparing a 3.5% down FHA loan to a 5% down conventional loan, the conventional rate and payment are almost always better, but this depends on your credit score.
- Conventional Minimum Down – 3% to 5% (depending on your income)
- FHA Minimum Down – 3.5%
The minimum credit score requirement for FHA is 580 and 620 for a conventional loan. That said, these minimums are not ideal scores to buy a home. The interest rate and payment that comes with these low credit scores will be much higher than they would be if your credit scores were better.
When we talk with potential borrowers who have credit scores this low, we STRONGLY suggest they work on increasing their score before obtaining a home loan.
The ideal credit score for a conventional loan is 680 or above. This is where conventional loan terms start to look good.
If you don’t have a credit score of 680 or higher, don’t worry. You can still get a great rate on an FHA loan. Especially if your credit score is 640 or above.
- Conventional ideal credit score – 680 or above
- FHA deal credit score – 640 or above
3. Rate and Payment
As a whole, conventional home loans have better terms. But sometimes FHA loans are better. Two factors impact which loan has the best rate and payment: credit and down payment.
- If your credit score is above 680, conventional has a better interest rate and payment.
- If you have a credit score below 680, FHA will likely have a better rate and payment.
- If you have at least 5% down, a conventional loan should give you a better rate and payment.
- If you have less than 5% down but are able to put at least 3.5% down, FHA should be better on rate and payment.
What’s Best for You?
Many factors go into determining your best home loan option. I asked our team of Home Loan Advisors to run several scenarios. On average, conventional was the best home loan option. However, there were times when FHA was best for the customer.
Generally speaking, this formula gives you an idea of which home loan may work best:
- 680 or above credit score with at least 5% down = Conventional
- 679 or below credit score with less than 5% down = FHA
As said on this blog, you need to keep personal finances personal. The home loan your neighbor has is unlikely to be the home loan you’ll need. That’s why it’s best to use a Mortgage Broker to help find your best option.
Stewardship Mortgage is an award-winning local Mortgage Broker here in AZ. We would be honored to chat with you to help determine which loan option is best. Schedule an appointment with one of our wise and loving home loan advisors below.