A conventional loan is usually the best option for those with good or excellent credit, as the mortgage rate and PMI costs will be lower. However, an FHA loan can be a great choice for those with a credit score between 500 and 600. For borrowers with lower credit scores, FHA loans are often the most affordable option. But these are just general guidelines.
The bottom line is that there is no one-size-fits-all answer. It's important to understand your own credit and financial situation and make sure you discuss all the details of any mortgage you're considering. In some cases, FHA loans may be easier to obtain and offer financial benefits. In other cases, conventional loans may be more cost-effective in the long run. FHA loans are often easier to apply for than conventional loans, making them attractive to those who fear being limited by their credit rating or debt-to-income (DTI) ratio.
For first-time homebuyers who don't have money to put down on a home, FHA loans can be especially attractive because they often require less money upfront. Credit union loans usually offer competitive rates and terms, in addition to flexible lending criteria, and if the credit union is approved by the Federal Housing Administration (FHA), you can get an FHA loan. The key to deciding which loan you should get is to understand the features of both programs and how they relate to your financial situation. This means that it's possible to get an FHA loan with a lower credit score than with other types of loans. You'll need a higher credit score (a minimum of 620) to apply for a conventional loan than you would need with an FHA loan. Unlike FHA loans, conventional loans can be used to purchase a secondary home, such as a vacation home or investment property.
Meanwhile, FHA mortgage insurance depends on the value and term of the loan, as well as the amount of the down payment. You can avoid having to pay for private mortgage insurance (PMI) by paying 20% of the loan in advance, which will reduce mortgage payments. You're more likely to qualify for an FHA loan with a DTI rate of 50% or less, but some borrowers do qualify with a rate greater than 50%. In fact, FHA loans usually require credit ratings of 580 or more, while the minimum for a conventional loan is 620, and many lenders require higher scores. This makes it generally easier to apply for FHA loans. FHA loans are insured by the Federal Housing Administration and conventional mortgages are not insured by a federal agency, but the lender assumes the risks associated with issuing the loan.
A conventional loan can be used to purchase a vacation home or investment property, as well as a primary residence. Some buyers may mistakenly believe that FHA loans are only for first-time homebuyers and that conventional mortgages are only for more established buyers.