FHA Loans vs. Conventional Loans: The Difference
Ready to buy a home but not sure about multiple loan options? Let's start your research by examining two types of mortgages: FHA and traditional loans, and their pros and cons.
What exactly is an FHA loan?
The Federal Housing Administration insures FHA loans, which are government-backed mortgages. FHA loans have fewer requirements and are a great option if you're concerned about saving enough for a down payment or have a low credit score.
What is a traditional loan?
Private lenders cover traditional loans that are not guaranteed or insured by the government. You'll need a higher credit score, a down payment, and a lower debt-to-income (DTI) ratio to qualify.
Traditional loans are sometimes called qualified loans because they meet the requirements of Freddie Mac and Fannie Mae. Freddie Mac and Fannie Mae are government-sponsored companies that buy mortgages from lenders and hold or sell them as mortgage-backed securities.
Offers traditional fixed and variable rate loans. Traditional loans and most other types of mortgages typically have terms of 10 to 30 years.
Credit Score Differences Between FHA and Traditional Loans
Whether you're applying for a traditional loan or an FHA loan, lenders will check your creditworthiness. Your credit score is a number that indicates how much risk a lender is willing to take when you apply for a loan.
Your credit score can vary from excellent (800+) to low (350-579) depending on your credit history etc. If you have a higher credit rating, lenders will see you as less risky.
Your credit rating may vary from institution to institution. Most lenders will consider your FICO score, a credit rating formula created by Fair Isaac Corporation, on a scale from 350 to 850 (high). Another credit scoring model used by lenders is VantageScore. and TransUnion, report your credit history and information.
The following factors are considered when calculating the score:
• Are you paying on time
• what do you do with your credit
• The length of your credit history
• Your newly created credit account
• the credit card you use
The type of loan you can get depends on your minimum credit rating.
Credit Requirements for Regular Loans
The creditworthiness criteria for traditional loans vary from lender to lender. Traditional mortgages, on the other hand, typically require a credit rating of 620 or higher.
Traditional loans have higher credit requirements than FHA loans because lenders take more risk and the government does not support traditional loans.
Creditworthiness Requirements for FHA Loans
You can get an FHA home loan with a credit score as low as 500, but with certain limitations. For example, if you have a credit score of 500, you must pay 10% to get an FHA loan.
The less down payment required for an FHA loan, the higher your credit score. Most FHA loan providers require a minimum credit score of 580.