Conventional and FHA loans — Part 1

Today is the first post in a series comparing the pros and cons of Conventional loans (otherwise known as Prime loans) to FHA loans. Both options are great programs, and to determine which option is best will involve looking at a complete picture of the borrower including income, assets, credit scores, etc. I recommend speaking with a mortgage consultant to consider the pros and cons of each to ensure you get the right fit for your particular situation.

The series will focus on these major factors including private mortgage insurance, down payment amounts, credit scores, down payment assistance programs, upfront fees, etc. While no one should be the single determining factor, this series will focus on one at the time in order to go in-depth into the pros and cons of each. Let’s begin the series by looking at credit scores.

A borrower’s credit score has always played an important role in qualifying borrowers for loans as well as determining their rate. Before 2007, any credit score above 680 would typically receive the same rate on a conventional loan. Some lenders cutoff point was 700, but the point is there was a larger range of scores that did not require a rate adjustment.

For borrowers with lower credit scores, adjustments were made to the rate for conventional loans, FHA loans were out there and offered fewer restrictions on credit scores, and there was a large and profitable subprime market that was flourishing.

The credit crunch and bursting of the housing bubble in 2007 changed all of this. On conventional loans, credit scores as high as 719 now require rate adjustments. This doesn’t even include the fact that it is really hard to get a loan with a credit score below 620. As before, FHA loans are more flexible with credit scores.

Here are some general points to consider when looking solely at a credit score to determine whether to use a Conventional or FHA loan.

— Credit scores of 700+ will qualify for a lower rate using a conventional loan.

— Credit scores ranging from 680-699 would typically qualify for a lower rate by using a conventional loan.

— Credit scores in the 640-679 range could go either way.

— Credit scores in the 620-639 range would typically qualify for a lower rate by using a FHA loan.

— Credit scores below 620 should definitely go FHA because of the difficulty being approved for a conventional loan with a credit score below 620. Even if a borrower qualifies for a conventional loan with a score below 620, the rate is significantly higher than going with an FHA program.

In the next post of the series, we will take a closer look at down payment amounts for both FHA and Conventional loans, how that affects rates, and looking at both credit scores and down payments when considering between the two programs.

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.

One Response to “Conventional and FHA loans — Part 1”

  1. FHA vs Conventional round… « The Mortgage Blog Says:

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