If you are not a veteran or looking to purchase in a rural area the two most common loans are FHA and Conventional.  If your scores are at or below a 620 the first loan you might consider is FHA. If your scores are higher, preferably at or above a 660 then you might consider a Conventional loan. Below are the main differences between FHA and Conventional. 

 

What Is an FHA Loan?: 

An FHA loan is a government-backed home loan insured by the Federal Housing Administration. An FHA loan typically has less restrictive qualifications on your debt-to-income ratio and credit score. 

 

FHA Loan Pros & Cons:

One of the advantages of opting into an FHA loan is that it can make it possible for individuals with lower credit scores and higher debt to income ratios the ability to purchase a home and/or refinance.

Before opting for an FHA loan, consider mortgage insurance costs, which can certainly add up over time. With an FHA loan, you’ll need to pay both an up-front mortgage insurance premium and a monthly mortgage insurance regardless of your down payment.  

 

What is a Conventional Loan?:

Conventional loans are not insured or guaranteed by a government agency, they’re insured by private lenders. For this reason, lenders extend conventional mortgages to applicants who have stronger financial profiles. As a general rule, you would want to have higher credit scores and a lower debt-to-income (DTI) ratio.  

 

Conventional Loan Pros & Cons:

A few of the advantages of opting into a Conventional loan.

  • You can borrow higher loan amounts. 
  • No monthly mortgage insurance when you put 20% down payment or get to 80% LTV
  • No upfront mortgage insurance premium 

 

On the other hand, you will need to be mindful of the stricter guidelines such as. 

  • Longer waiting periods on bankruptcies and foreclosures 
  • Higher mortgage insurance rates for lower credit scores 
  • More restrictions on your debt-to-income ratio (DTI)

 

In summary, increase your scores as highest possible preferably over a 660+, and keep your debt low to increase your chances of qualifying for a conventional loan.