Difference between an FHA loan and Conventional loan.

Posted by Kim Jones-Zweig on Thursday, May 31st, 2018 at 12:13pm.

FHA Mortgages: 

FHA is a government insured mortgage program. This program has more relaxed guidelines than a conventional loan.  When using FHA, expect to put at a minimum of 3.5% of the purchase price in as a down payment.  This can come from either your own funds or those from a close relative in the form of a “gift”.  FHA sets a minimum credit score of 580, at which you can qualify.  

Average FHA loan limit is $275,665, depending on the County you purchase it.  Can be higher in Metro-Atlanta or Greens County Georgia.

FHA Mortgage Insurance:

FHA requires two different types of mortgage insurance.  The first is called the upfront mortgage insurance premium (UFMIP) and is 1.75% of the total loan amount that you are borrowing.  It can be paid out of pocket at closing or can be rolled into the loan amount. 

The second type of mortgage insurance is called monthly mortgage insurance and this will apply regardless of your down payment. FHA mortgage insurance is permanent on your loan, regardless of how much you are able to put down, or how much the property may increase in value during that time. The premium generally runs at a rate of .85% of your loan amount

FHA mortgages have relaxed asset reserve requirements (the amount of money you need liquid after closing). There are no mortgage reserve requirements for a single-family residence. The one exception to the reserve requirement would be when you are buying a multi-family home particularly a 3 or 4 family dwelling, FHA does require reserves in this case.

You can only purchase a primary home with an FHA loan.  No second or investment homes.  You can, however, purchase a 2-4 unit home and if you live in one of the units, this would be considered a “primary” home.

Lastly, the seller can pay up to 6% of your sales price, in closing fees for you.   Whereas on a Conventional loan, those guidelines differ, depending on your down payment. And the mortgage rate is generally lower too. 

Conventional Mortgages:

Conventional mortgages, which are insured by Fannie Mae and Freddie Mac, are for those borrowers with higher scores and more asset reserves than those looking at FHA as an option.  Minimum credit scores for Conventional mortgages are 620.  Housing mortgage reserves will typically require two months of your total housing payment,  meaning your mortgage payment, property taxes, property insurance and any HOA dues. This will be an addition to your closing costs fees.  Expect to put down a minimum of 3% when you purchase a home using a conventional mortgage if you are a first-time homebuyer and 5% if you have owned a home in the last 3 years.  

Average Conventional loan limit in most Counties is $453,100. Loan Amounts over that must follow the "JUMBO" loan guidelines.

Conventional Monthly Mortgage insurance (aka MI) only applies if you are putting less than 20% down, and if you are putting 20% or more down, there will be no monthly mortgage insurance.  Mortgage insurance on Conventional loans is generally less expensive than FHA, depending on your credit score and type of property you are purchasing.

Seller contributions (the amount of your closing costs the seller can pay), vary with Conventional loans and are as follows:

Conventional: Fannie Mae/Freddie Mac – Owner Occupied:

  • 25% or more down payment = 9% allowed in seller contribution

  • less than 25% down and up to 10% down payment = 6% allowed in seller contribution

  • Less than 10% down payment = 3% allowed in seller contributions

 

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