WHEN TO CHOOSE A CONVENTIONAL LOAN VERSUS AN FHA LOAN

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Two of the most popular types of mortgages you can apply for in Indianapolis are conventional loans and FHA mortgages.

You may have a hard time understanding the differences between these two types of loans and the pros and cons of each. What type of mortgage is the most appropriate for your situation?

To help you make an informed decision, here are some guidelines for when a conventional loan or FHA mortgage might make the most sense.

When to choose a conventional loan in Indiana

A conventional mortgage is not insured by a government department like the FHA or VA. Conforms to Fannie Mae and Freddie Mac Mortgage Compliance Guidelines.

Here are some situations where a conventional loan might make sense:

  • When you have a high credit score and a low DTI. If you have a reasonably strong credit score and debt-to-income (DTI) ratio, you may be a strong candidate for a competitive mortgage with a low down payment and low interest rates. Your credit score must not be less than 620 and your DTI index must not exceed around 43%.
  • When you are flexible with a down payment amount. With a competitive credit score and DTI rating, you could have a low down payment when you buy a home with a conventional loan. But if you can afford a higher down payment, a conventional loan can be a great option even without perfect credit or an ideal DTI ratio. If you do, you may qualify for low interest rates and no PMI requirements.
  • When you need to buy a primary home or other type of property. With a conventional mortgage, you can finance not only the purchase of a primary residence, but also a second home, vacation home, or rental property.
  • When you want the fastest and easiest mortgage process. Ownership standards for conventional loans are a bit more relaxed than for FHA loans. The mortgage process also tends to be routine and easy for a quick closing. That being said, if you go through an experienced FHA mortgage company like Grandview Lending, the FHA loan process can be quick and easy as well.

When to choose an FHA loan in Indiana

An FHA mortgage is backed by the Federal Housing Administration. This support reduces credit score and DTI requirements while keeping interest rates competitive.

Below are some situations where an FHA mortgage might be the best fit.

  • When you have a lower credit score and a higher DTI. When your credit score is below 620 and/or your DTI is above 43%, an FHA mortgage allows you to buy a home with low interest rates and an affordable down payment. Of course, the higher your score, the lower your DTI index, the more competitive the loan offers you receive.
  • When you can pay your mortgage insurance premiums. You have to purchase mortgage insurance as part of your FHA loan agreement. It is an ongoing monthly expense. An FHA mortgage is appropriate only when you can afford this expense in addition to your premiums and interest.
  • When your down payment funds are limited. Putting a higher down payment on a home is the key to improving conventional loan offers when your credit score isn’t perfect. But this is not an option for all homebuyers. If you don’t have the ability to put a 20% down on a home, consider an FHA mortgage. If your credit score is at least 500, you may qualify for a 10% down payment. If your credit score is at least 580, you may qualify for a 3.5% down payment. Even when you make a low down payment on a home with an FHA mortgage, competitive interest rates are still available. The reduced risk profile of an FHA mortgage combined with the insurance you’re paying for is what makes it possible.
  • When you are buying a primary residence. You cannot use an FHA mortgage to purchase a property if it will not be your primary residence. If you buy a multi-use property with an FHA mortgage, you will have to live in it.
  • When lower loan limits are not a concern. Loan limits for FHA mortgages tend to be low compared to other types of home loan limits. For many homebuyers, this won’t be a problem. However, if you need higher loan limits, you may need a different type of loan.

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