When it comes to finding out which loan is right for you many factors need be taken into consideration and knowing your options is the best place to start. Today's post we are going to talk about the two most common loan programs - FHA and Conventional.
Let's start with how much money do you want to put down on your home. A common myth out in the industry is that you need 20% down to get in to your dream home, while for some people this may be true this is not a hard fast rule by any means.
Let's look at FHA first for example:
FHA will allow you to get in to a home with as little as 3.5 % down with no additional restrictions - the nice thing about this is your down payment can come completely from a gift from a family member. (Assuming all Underwriting guidelines are met) Keep in mind no matter how much you put down on FHA you will be required to pay an Up Front Mortgage Insurance (UFMIP) and a life time mortgage insurance (MIP)
Conventional will all you to get in your home with as little as 3% down. Putting 3% down on a Conventional loan is going to have some caveats that we need to discuss.
Number 1 - Conventional offers two programs called Home Ready and Home Possible, these two loan programs require you to qualify by meeting an Area Median Income requirement. Think of this in simple terms if you make too much money you cannot qualify for these programs. Some of the big benefits to these two program are lower MI factors, lower rates, and lower down payment. The link below will all you to search and check your own AMI for your area.
Number 2 - If you do not meet the Home Ready and Home Possible qualifying options you need to fall under the category of a first time home buyer. A first time home buyer is defined as someone who has not had ownership interest in a property in the last 3 years. (Yes, being on title counts!) As long as at least one borrower on the loan is a first time home buyer you can do 3 % down.
If you do not meet one of the two options above you will need to bring at least 5% down but just like FHA this entire down payment can be a gift from a family member(Assuming all Underwriting guidelines are met)
Keep in mind if you are putting less than 20% down you will need to have private mortgage insurance on your loan. This will be paid either monthly as a borrower paid MI, or included in your rate as a lender paid MI.
Next we need to discuss your debt to income ratio. (DTI) Your DTI is a huge determining factor on if you qualify for a loan or not, lets breakdown the two options again.
FHA will allow your DTI to go pretty high in most cases. In my experience I have come across borrowers that have been approved on an FHA loan with a DTI as high as 55%. This gives you as a borrower much more flexibility when it comes to your monthly payment, and debt that may or may not need to be paid off for you to get in to your loan. Always remember just because you can go to 55% does not mean you will necessarily get approved at 55%. The rule of thumb on FHA in general is stay under 50% and you SHOULD be good.
Conventional tends to be much more conservative when it comes to your allowable DTI. In my experience I have witnessed borrowers qualify with a DTI as high as 49%. As I mentioned above with FHA just because you can be approved that high doesn't mean you will. To be safe with Conventional keep your DTI below 45% and you SHOULD be safely approved.
The last item to discuss is your credit score (most people call this your FICO but really FICO is just a score model for your actual score)
As you will notice a little bit of a trend here FHA is a bit more lax on your credit score. There are lenders out in the market place that will allow you to get in to an FHA loan with a credit score as low as 580. As I have said before just because you can qualify with a 580 doesn't mean you should. A credit score below 600 is going to require you as a borrower to jump through a lot of hoops. My recommendation in this instance is find a good credit rehab company build your score and wait!!! You will thank me in the long run.
Conventional follows the same trend as well which is more times than not you are going to need a higher credit score to qualify. Most lenders are going to cap you at a 620 credit score. In this instance I would offer the same recommendation which is take some time repair your credit and get in to a much easier and better priced loan.
I personally have always been bias towards conventional loans because I feel it gives you the borrower the easiest underwriting approval. At the end of the day the best option for you is your decision based off of your personal situation and what you feel most comfortable with. Make sure you always reach out and speak with a mortgage expert to help assist in making the best decision for you.