The long battle between conventional and FHA loans can leave you with an unresolved dilemma. These are two popular options for first-time homebuyers. FHA loans have relaxed credit score guidelines and conventional loans do not have private mortgage insurance. A large down payment still makes things better for both loans, but you should find out which one caters to your requirements.
FHA loans are acknowledged as 500 credit score home loans in Houston. Because of the low credit score requirement, this seems to be a well-suited name. However, conventional mortgage programs do not turn out to be a bad fit when you have your eyes on an expensive house. Borrowers with excellent credit do not want to stay stuck with a PMI forever. This does not mean you have got your answer. At times, an FHA loan stays ahead of a conventional loan. Let’s check out the reasons why the FHA mortgage makes a better choice.
Credit Score Requirements
FHA loan programs are designed specifically for buyers with recovering or bad credit scores. Therefore, the lowest credit score requirement does not surprise anyone. For first-time homebuyers who are yet to improve their credit, the mortgage program serves the purpose. Besides the primary credit score requirement of 500, there is a secondary credit eligibility requirement. If your credit score is above 580, you are eligible for a 3.5% down payment. On the other hand, a conventional mortgage allows a credit score of 620 as the lowest requirement. Even if your credit score is in trouble but the application is blemish-free, the interest rates will be unbelievably high.
Income Requirements
When you are split between an FHA and a conventional loan, the debt-to-income ratio is an important factor. Conventional mortgages allow a 45% or lower debt-to-income ratio. Of course, the ratio widely varies from one lender to another. FHA loans, already known as, the first-time homebuyer’s programs allow a higher DTI ratio. Many buyers who had a high DTI ratio for Fannie or Freddie can easily pass for the FHA programs. The monthly mortgage payments are less than rent. So, FHA loan programs are not a bad choice if you are in debt.
Mortgage Rates
When it comes to interest rates, FHA loans are clearly a winner. The program tends to assure a lower interest rate than conventional programs. FHA borrowers are not likely to pay down the mortgage any time soon – not before conventional buyers. The rates will differ from lender to lender and you should check your options. The savings you acquire from an FHA loan is easily covered by private mortgage insurance you pay over the life of a mortgage. When you are worried about whether you can find a lower rate, many options are available. An adjustable-rate mortgage is one, besides paying for the points.
In essence, a 500-credit-score mortgage can help you achieve your coveted dream of homeownership. But it’s you who is getting the loan! Run the pros and cons and figure out which mortgage you need.
