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What’s the Difference Between FHA and Conventional Loans?

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Whether you’re buying a new home or thinking of refinancing your current mortgage, it always pays to explore your options so you can get the best deal. Two of the most common loans are conventional loans and FHA loans. In 2018, 61% of all borrowers chose a conventional loan, while 17% took out an FHA loan, according to the National Association of Realtors 2018 Profile of Home Buyers and Sellers.

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A conventional loan, or conforming loan, is a mortgage that is not backed by a government agency, but does conform to standards set by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). It typically has a fixed rate and term, the most common being 30-year fixed. Conventional loans are the most popular home mortgage product.

FHA loans are backed by the Federal Housing Administration, so lenders have more flexibility to offer loans to borrowers, using less stringent qualifications.

Except for borrowers seeking a specialized home loan program, like veterans, the majority of borrowers will end up with one of these two mortgage types. The question is, which one is best for you?

Read on to explore the benefits, drawbacks and qualifications of each type of home loan. This information can help you figure out which loan is best suited to your needs.

The dirt on FHA loans

FHA loans can provide individuals who might not otherwise qualify a pathway to homeownership, said Tendayi Kapfidze, chief economist at LendingTree, which owns MagnifyMoney.

Pros of FHA loans

The most obvious pro is that FHA loans have lower credit score and down payment requirements than conventional loans. Interest rates are also favorable, usually slightly lower than conventional loans, because of the government backing, Kapfidze said.

Cons of FHA loans

The biggest con is that FHA borrowers have to pay a substantial mortgage insurance premium (MIP), which is what allows the government to back the loans, Kapfidze said. You’ll have to pay 1.75% of the total mortgage price up front, and then you’ll have a monthly MIP, the amount of which depends on your LTV, or loan-to-value ratio, for the life of the loan. If you put down more than 10% on the home, you may have the opportunity to stop paying MIP after 11 years.

FHA applications also tend to be a bit more tedious than other loan programs, and homes must meet safety standards set by the Department of Housing and Urban Development (HUD) in order to be approved for the loan. In addition, FHA loans are typically only for borrowers who will occupy the property they are purchasing, so they can’t be used for investment properties or second homes.

Which borrowers can benefit the most?

For borrowers with less-than-stellar credit, or who don’t have the ability to save a lot toward a down payment, an FHA loan can be a great option, said Andrew S. Weinberg, principal of Silver Fin Capital Group LLC, a mortgage brokerage in Great Neck, N.Y.

“Let’s say you want to buy a house, but you have a 580 credit score, or you don’t have much cash in post-closing reserves. FHA will allow that,” Weinberg said.

How do I qualify?

FHA lenders consider a number of factors, including income, credit history, debt-to-income (DTI) ratio, down payment and cash reserves. You’ll have to submit proof of employment, tax returns and other documentation, and have at least a 3.5% down payment.

The dirt on conventional loans

Conventional loans are typically fixed-rate loans for buyers who have strong credit and income, and meet other minimum qualifications.

Pros of conventional loans

For borrowers who are able to make a 20% down payment, there is no mortgage insurance. Those who put down less than that will pay private mortgage insurance (PMI), but only until they achieve 20% equity in the home.

Another pro is that conventional mortgages can be used for second homes or investment properties.

Cons of conventional loans

Because the government doesn’t back conventional loans, credit score requirements are typically higher, usually a minimum of 620, although this can vary by lender.

Which borrowers can benefit the most?

If you have a strong credit history and meet other requirements, conventional loans are usually cheaper, Kapfidze said, especially if you can afford 20% down and don’t have to pay PMI. Even if you have to pay PMI, you won’t have to pay an upfront premium, and you can stop paying PMI once you’ve achieved 20% equity.

How do I qualify?

Besides having a clean credit report, you’ll need to have sufficient income to make the mortgage payments. Lenders also want to see that you have cash reserves in case you lose your income, and that your DTI is less than 45%. Exceptions are sometimes made up to 50%, as long as you have a top-notch credit score to compensate.

FHA loans vs. conventional loans

While both loans are typically fixed-rate mortgages with similar interest rates, the key differences lie in their general requirements for approval and process.

FHA loans have more restrictions regarding the nature of the property you’re buying, as well as that pesky MIP, which offsets their lower interest rates.

Conventional loans may require PMI payments if you’re putting down less than 20%. You can also purchase a home for any purpose, and the appraisal process will likely be less intense than it is for an FHA loan.
So which one is better?

“I wouldn’t say one loan type is better or worse; it’s more about what fits your financial situation,” Kapfidze said.

Take a closer look at how some of the key factors compare:

Conventional loans vs. FHA loans
ConventionalFHA
Minimum credit requirements620As low as 500
Down payment requirementsAs little as 3%As little as 3.5%
PMI/MIP requirementsIf your down payment is less than 20%, you’ll pay PMI. You can request it to be removed once you have an 80% LTV ratio, or automatically at 78%.An upfront mortgage fee of 1.75% of the loan amount, plus monthly MIP payments for the life of the loan. One exception: if you put down more than 10% initially, you may be able to end MIP payments after 11 years.
Waiting period requirements after bankruptcy/foreclosureFor Chapter 7 or Chapter 11 bankruptcy, the waiting period is four years from the discharge or dismissal date, or two years if you can prove extenuating circumstances.

For Chapter 13 bankruptcy, the waiting period is two years from the discharge date, or four years from the dismissal date.

For foreclosures, a seven-year waiting period is required from the completion date of the foreclosure action, or three years if you can prove extenuating circumstances.
For Chapter 7, a waiting period of less than two years, but not less than 12 months, may be acceptable if you can prove extenuating circumstances and that you’ve managed your finances well.

For Chapter 13 bankruptcy, you’ll need to wait one year into the bankruptcy payout. You’ll also need to prove you’ve made one year of on-time payments toward the bankruptcy and get written permission from the bankruptcy court.

For foreclosures, the waiting period is generally three years. Extenuating circumstances and reestablishing strong credit since the foreclosure may waive the waiting period.
DTI requirements43% is the rule of thumb for many lenders, but Fannie Mae and Freddie Mac will back loans up to 50%.
31/43, which means 31% of income is the max for front-end (or home-related) DTI, and 43% is the max for back-end (total) DTI. FHA allows wiggle room on a case-by-case basis depending on your credit score, cash reserves and other compensating factors.
RatesIn December 2018, the average interest rate on a 30-year fixed-rate loan was 4.64%Usually lower than conventional mortgage rates.

FHA vs. conventional loan refinancing

Refinances made up 18% of all FHA loans and 31% of all conventional loans in November 2018, according to Ellie Mae.

If you’re thinking of refinancing your existing mortgage, here’s what you need to know about your options.

If you currently have an FHA loan, you might consider an FHA Streamline refinance. This allows you to take your existing FHA-insured mortgage and refinance to a new FHA loan with limited credit documentation. To qualify, you must be current on your existing FHA loan. There must also be a benefit to you, meaning the refinance will lower your monthly payment or reduce your interest rate.

If you want to refinance your current mortgage — whether it’s FHA, conventional or non-conventional — into a conventional loan, the qualifications are pretty much the same as what you’d need to qualify for a conventional mortgage for a home purchase. The main difference is that for a conventional refinance, you typically also need to have at least 20% equity, or an LTV of 80% or less, but lender preferences vary.

If you have ample equity, you might also consider what’s called a cash-out refinance, in which you borrow a lump sum of cash on top of the mortgage amount. Most lenders allow for a cash-out refinance up to 80% of the value of the property, but underwriting criteria may be stricter.

Ultimately, if you’re thinking of refinancing, you want to be sure there is a clear benefit, whether it is lowering your monthly payment, reducing the amount of interest you’ll pay in the long run or both.

Going from an FHA to a conventional loan (especially without PMI) will usually be beneficial, but it depends on whether you can qualify and at what interest rate. For FHA borrowers who don’t qualify for a regular FHA loan refinance, a Streamline FHA refinance could be the next best thing. And for those who already have a conventional loan, lowering the interest rate would be the main motivation to refinance to a new loan.

Shopping for an FHA or conventional loan

When you’re ready to move forward, Weinberg advised getting a recommendation for a couple of licensed mortgage loan originators or brokers who can guide you and answer your questions.

“Don’t speak to 10, or you will have information overload and will find it hard to keep track and to compare,” he said.

Brokers work with scores of lenders and can do the work of shopping for your loan and finding the right lender and program to fit your financial situation.

Finding the right loan

Having options might seem overwhelming at first, but they make it more likely you’ll find a loan that fits your financial profile and lifestyle, Kapfidze said.

“It’s like buying a car. Not everyone wants or needs a truck, and not everyone wants a sports car, but most people find a car that suits their needs and within their budget,” he said.

If you’re still not sure whether an FHA or conventional mortgage is right for you, start by examining where your credit stands and work with a professional who can help you.

This article contains links to LendingTree, our parent company.

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Mortgage

How to Recover From Missed Mortgage Payments

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understanding good faith estimate vs loan estimate
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Can you bounce back from a missed mortgage payment or two? The answer is yes, but there’s work involved. After all, your payment history has the greatest impact in determining your credit score.

Falling behind on your mortgage payments can affect your credit and finances, and you could lose your home to foreclosure. It’s critical to be proactive and not wait until it’s too late to get help.

How missed mortgage payments affect your credit

In most cases, mortgage lenders give you a 15-day grace period before charging a fee — often around 5% of the principal and interest portion of your monthly payment — for late payments. But your credit history typically isn’t impacted until you’re at least 30 days behind on a mortgage payment. At this point, your mortgage servicer may report your late mortgage payment to the three major credit reporting bureaus: Equifax, Experian and TransUnion.

Your credit score could drop by 60 to 110 points after a late mortgage payment, depending on where your score started, according to FICO research. Being 90 days late on your loan could lower your score by another 20 points or more.

It can take up to three years to fully recover from a credit score drop after being a month behind on your mortgage, FICO’s research found. Once you’re three months behind on your mortgage, that time can increase to seven years.

Recovering from missed mortgage payments

Falling behind on your mortgage can be a frustrating and scary experience, particularly if you’re facing the threat of foreclosure. Here are some options to help you get back on track after missed mortgage payments:

  • Repayment plan. Your loan servicer agrees to let you spread out your late mortgage payments over the next several months to bring your loan current. When your upcoming payments are due, you’d also pay a portion of the past-due amount until you catch up.
  • Forbearance. Your servicer temporarily reduces or suspends your monthly mortgage payments for a set amount of time. Once the mortgage forbearance period ends, you’ll repay what’s owed by one of three ways: in a lump sum, a repayment plan or by modifying your loan.
  • Modification. A loan modification changes your loan’s original terms by extending your repayment term, lowering your mortgage interest rate or switching you from an adjustable-rate to a fixed-rate mortgage. The goal is to reduce your monthly payment to a more affordable amount.

Be proactive about getting back on track and reaching out to your lender for help instead of waiting until you get late payment notices. If you think you’ll be behind soon or are already a few days behind, make contact now and review your options.

Extra help for homeowners affected by COVID-19

If you’re behind on mortgage payments because of a financial hardship due to the coronavirus pandemic, you may qualify for a mortgage relief program through the Coronavirus Aid, Relief and Economic Security (CARES) Act.

Homeowners who have federally backed mortgages, and conventional loans owned by Fannie Mae or Freddie Mac, can request mortgage forbearance for up to 180 days. They can also request an extension for up to an additional 180 days.

Federally backed mortgages include loans insured by the:

  • Federal Housing Administration (FHA)
  • U.S. Department of Agriculture (USDA)
  • U.S. Department of Veterans Affairs (VA)

Reach out to your mortgage servicer to request forbearance. Even if your loan isn’t backed by a federal government entity, Fannie Mae or Freddie Mac, your servicer may offer payment relief options. You can find your servicer’s contact information on your most recent mortgage statement.

How many mortgage payments can you miss before foreclosure?

Your lender can begin the foreclosure process as soon as you’re two months behind on your mortgage, though it typically won’t start until you’re at least 120 days late, according to the Consumer Financial Protection Bureau. Still, it’s best to check your local foreclosure laws since they vary by state.

Here’s a timeline of how missed mortgage payments can lead to foreclosure.

30 days late

Your lender or servicer reports a late mortgage payment to the credit bureaus once you’re 30 days behind. Your servicer will also directly contact you no later than 36 days after you’re behind to discuss getting current.

45 days late

You’ll receive a notice of default that gives you a deadline — which must be at least 30 days after the notice date — to pay the past-due amount. If you miss that deadline, your servicer can demand that you repay your outstanding mortgage balance, plus interest, in full.

Your mortgage servicer will also assign a team member to work with you on foreclosure prevention options. This information will be communicated to you in writing.

60 days late

Once you’re 60 days late, expect more mortgage late fees, as you’ve missed two payments. Your servicer will send you another notice by the 36th day after the second missed payment. This same process applies for every month you’re behind.

90 days late

At 90 days late, your servicer may send you a letter telling you to bring your mortgage current within 30 days, or face foreclosure. You’ll likely be charged a third late fee.

120 days late

The foreclosure process typically begins after the 120th day you’re behind. If you live in a state with judicial foreclosures, your loan servicer’s attorney will file a foreclosure lawsuit with your county court to resell the home and recoup the money you owe. The process may speed up in nonjudicial foreclosure states, because your lender doesn’t have to sue to repossess your home.

You’re notified in writing about the sale and given a move-out deadline. There’s still a chance you can keep your home if you pay the amount owed, along with any applicable legal fees, before the foreclosure sale date.

Can you get late mortgage payment forgiveness?

If you’ve otherwise had a good payment history but now have one missed mortgage payment, you could try writing a goodwill adjustment letter to request that your servicer erase the late payment information from your credit reports.

Your letter should include:

  • Your name
  • Your account number
  • Your contact information
  • A callout of your good payment history prior to missing a payment
  • An explanation of what led to the late mortgage payment
  • The steps you’re taking to prevent late payments in the future

End the letter by requesting that your servicer remove the late payment from your credit reports, and thank your servicer for their consideration. Print, sign and mail your letter to your servicer’s address.

The letter is simply a request; your servicer isn’t required to grant late mortgage payment forgiveness. If your servicer agrees to remove the late payment info from your credit reports, your credit scores may eventually increase — so long as you continue to make on-time payments.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.

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Mortgage

What Is the Minimum Credit Score for a Home Loan?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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If you’re hoping to become a homeowner, your credit score may hold the keys to realizing that dream. Knowing the minimum credit score needed for a home loan gives you a baseline to help decide if it’s time to apply for a mortgage, or take some steps to boost your credit first.

It’s possible to get a mortgage with a score as low as 500 if you can come up with a 10% down payment. Keep reading to learn the minimum credit score requirements for the most common loan programs.

What are the minimum credit scores for home loans?

Your credit score plays a big role in determining whether you qualify for a mortgage and what your interest rate offers will be. A higher credit score means you’ll likely get a lower rate and a lower monthly mortgage payment.

There are four main types of mortgages: conventional loans, and government-backed loans insured by the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA). Conventional loans, which are the most common loan type with guidelines set by Fannie Mae and Freddie Mac, have a credit score minimum of 620. Although some loan programs don’t specify a minimum credit score needed to qualify, the approved lenders who offer them may set their own minimum requirements.

The table below features the minimum credit scores for these home loans, along with minimum down payment amounts and for whom each of the loans is best.

Loan type

Minimum credit score

Minimum down payment

Who it’s best for

Conventional6203%Borrowers with good credit
FHA500-579 with 10% down payment
580 with 3.5% down payment
10% with a score of 500-579
3.5% with a minimum score of 580
Borrowers who have bad credit and are purchasing a home at or below their area FHA loan limits
VANo credit minimum, but 620 recommendedNo down payment requiredActive-duty service members, veterans and eligible spouses with VA entitlement
USDA640No down payment requiredBorrowers in USDA-eligible rural areas with low- to moderate-incomes

What is a good credit score to buy a house?

Meeting the minimum score requirement for a home loan will limit your mortgage options, while higher credit scores will open the doors to more attractive rates and loan terms. A good credit score can also provide you with more choices for home loan financing.

  • 740 credit score. You’ll typically get your best interest rates for a conventional mortgage with a 740 (or higher) credit score. If you make less than a 20% down payment, you’ll pay for private mortgage insurance (PMI). PMI protects the lender in case you default on your home loan.
  • 640 credit score. Rural homebuyers need to pay attention to this benchmark for USDA financing. Exceptions may be possible with proof that the new payment is lower than what you’re paying for rent now.
  • 620 credit score. The bare minimum credit score for conventional financing comes with the largest mark-ups for interest rates and PMI.
  • 580 credit score. This is the bottom line to be considered for an FHA loan with a 3.5% down payment.
  • 500 credit score. This is the lowest credit score you can have to qualify for an FHA loan, but you must put 10% down to qualify.

Annual percentage rates by credit score

Your mortgage rate is a reflection of the risk lenders take when they offer you a loan. Lenders provide lower rates to borrowers who are the most likely to repay a mortgage.

Here’s a glimpse of the annual percentage rates (APRs) and monthly payments lenders may offer to borrowers at different credit score tiers on a $300,000, 30-year fixed loan. APR measures the total cost of borrowing, including the loan’s interest rate and fees.

FICO Score

APR

Monthly Payment

760-8503.011%$1,267
700-7593.233%$1,303
680-6993.410%$1,332
660-6793.624%$1,368
640-6594.054%$1,442
620-6394.6%$1,538
*Based on national average rate data from myFICO.com for a $300,000, 30-year, fixed-rate loan as of May 4, 2020.

As the credit score ranges fall, the interest rates are higher. Borrowers with a score of 760 to 850, the highest range, saw an average monthly payment of $1,267. Borrowers in the lowest credit score tier of 620 to 639 saw their monthly payment jump to $1,538. The extra $271 in monthly payments adds up to an additional $97,560 in interest charges over the life of the loan.

Steps for improving your credit score

Now that you have an idea of the extra cost of getting a minimum credit score mortgage, follow some of these tips that may help boost your score.

  • Make payments on time. It may seem obvious, but recent late payments on credit accounts hit your scores the hardest. Set your bills on autopay if possible to avoid forgetting to pay one.
  • Pay off balances monthly. Try to pay your entire balance off each month to show you can manage debt responsibly.
  • Keep your credit card balances low. If you do carry a credit card balance, charge 30% or less of the available credit limit on each account.
  • Have a mix of different credit types. Mortgage lenders want to see you can handle longer-term debt as well as credit cards. A car loan or personal loan will help demonstrate your ability to budget for installment debt payments over time.
  • Avoid applying for new accounts. A credit inquiry tells your lender you applied for credit. Even if you were applying to get your best deal on a credit card or car loan, multiple inquiries could drop your scores, and give a lender the impression you’re racking up debt.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.