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FHA or Conventional? What’s Right for Me?

Most homebuyers choose FHA loans and conventional loan products. Which one might work best for you? Do you know the difference between FHA and conventional mortgages? Benefits and costs vary quite a bit.  Let’s compare the basics. One type of loan will better help you achieve your homebuying goals. 

Conventional Loans - Colorado

Conventional loans appeal to borrowers who have good-to-excellent credit while the FHA loan package accommodates lower credit scores. Lenders usually require higher down payments for conventional packages than they do for the FHA packages. Applicants with a few of the following qualities are good candidates for conventional loans:

  1. Credit score of 640 or better
  2. Good Income
  3. Saved larger down payment of 20 percent
  4. Plan to buy a home priced over $340,000

Conventional loan products allow borrowers to apply for higher loan amounts. For single family homes, the amount in El Paso County, Colorado goes up to $484,350. The loan limit increases for 2-unit, 3-unit, and 4-unit properties where it reaches more than $800,000.

Down payment requirements also depend on the type of conventional loan. Normally, 20-percent down is standard and advisable. But the down payment may be reduced to 5 percent or lower. For example, the Conventional 97 loan requires a 640+ credit score and only 3 percent down. At times these borrowers must keep money in reserve.

Mortgage insurance costs are less expensive with conventional loans. Lenders look at loan-to-value ratios. Private mortgage insurance (PMI) is optional for buyers who put down at least 20 percent. Money can be saved down the line. PMI is also optional after any mortgage is paid down to 70 percent of the home’s value. 

Some borrowers run into snags with conventional loans. Those people take a harder look at the large down payments. But they might also find it more difficult to qualify for a conventional loan, especially since a higher credit score is necessary. In addition, interest rates are higher with conventional loans. This is mostly because the loan amounts can be higher and therefore riskier for lenders. 

Large down payments and higher interest rates deter some folks from choosing conventional loan products. So, they look to the FHA loans. 

FHA Loans in Colorado

The FHA tends to be more flexible than the conventional loan. Lenders offering FHA loans accept credit scores down to 580.  In addition, the FHA loan package comes with lower mortgage interest rates. The big advantage of the FHA mortgage comes down to the ability to get into a home with lower credit scores and less cash on hand. 

  • Credit scores 580 and above require just 3.5 percent down payments
  • Credit scores of 500-579 require 10 percent down payments

Applicants do not need money in reserve either. To help even more, a third party may gift both the down payment and the closing costs. These doable cash requirements are all-important for some borrowers. 

Disadvantages of FHA loans often cause homebuyers to look further or to save more. Buyers are faced with lower maximum loan limits than conventional loans. They may send them to the FHA-approved condo market. Mortgage insurance/PMI is a requirement for all FHA loans, even with 20 percent down. Its monthly cost is substantial and lasts for the life of the mortgage.

To help you find the best mortgage for you, contact Springs Home Mortgage.

*Loan limits as of 08/13/2019 FHA loan limits are for El Paso County Colorado. Loan limits may vary by county and are subject to change. Please contact a loan officer for details.