Deciding Between FHA & Conventional Financing

House and Keys in Female Hands

There are basically two main routes that are commonly used these days when looking for financing for home purchases: FHA and Conventional. Here is a brief primer of how both work.

FHA Financing
FHA is getting more popular these days as credit guidelines become more stringent and cash-strapped borrowers look for lower down payments. Compared to Conventional mortgages, FHA loans are easier to get, but are more costly.

Credit score requirements vary from lender to lender, but will usually be in the 640 range. FHA actually allows lower scores, but most lenders won’t take that kind of risk. There are no asset reserve requirements that need to be met with FHA.

There are two types of mortgage insurance that apply here. There is what is called upfront MI, which is normally financed, and then there is monthly mortgage insurance, made with the monthly payments. Mortgage insurance must be in place for at least five years, unless refinanced at a higher value.

Conventional Financing
These mortgages, while less costly than their FHA counterparts, have more stringent requirements. Minimum credit scores are in the 680s and above. Asset requirements are two months of mortgage payments, including taxes, property insurance and mortgage insurance if it applies.

Mortgage insurance will be required on purchases where there is less than 20% equity in the property, unless there is some type of second mortgage taken out. Insurance is required to be in place until loans are at either 78% loan to value, or value increases to that level.


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