"I'm a first time buyer, so I'll need an FHA loan right?" -you (maybe)

And the answer is "not necessarily.

Conventional loans have programs for first time buyers as well (lower minimum down payment requirement)

FHA makes loans more accessible/affordable for people with lower credit scores.

But there are a few nuances to the differences between the two types of mortgages.

Read through this, and then maybe check out my other post on how to compare loan terms side by side a little easier between FHA and Conventional.

Here's what I'll cover:

• Down payment
• credit score
• mortgage insurance
• appraisal
• underwriting

Down Payment

3.5% FHA minimum for 580+ credit score buyers. 10% for 500-579 credit score buyers

3% Conventional for first timers.

3% for buyers with an annual income limit below 80% of the area median income.

5% for repeat buyers above the 80% AMI.

20% down payment to avoid paying a monthly mortgage

Credit Scores

620+ for conventional. 500+ for FHA

Conventional is better-suited for buyers with 740+ credit scores.

FHA offers better rates and payments for buyers under 740.

Mortgage insurance

Mortgage insurance protects the lender if you default.

Loans with less than 20% down payment are considered riskier if they don't have this insurance.

Mortgage insurance is required on all FHA loans, regardless of the down payment.

And if you don't put 10% or more, then the FHA mortgage will have mortgage insurance on it for the life of the loan.

FHA has an upfront mortgage insurance charge.

It isn't charged to you out of pocket, rather it eats into your home's equity, because it gets financed into the loan.

This charge is 1.75% of the loan amount.

Conventional needs mortgage insurance if your down payment is less than 20%

The mortgage insurance can be removed by either waiting for your scheduled equity to hit 22% OR if you've paid extra to reach 20% equity quicker. OR after about 2 years you may request an appraisal if your home's equity has jumped up drastically enough to have 20% equity.

Conventional does NOT charge an upfront mortgage insurance premium.

Appraisals

Conventional loans may accept cheaper, quicker appraisals than FHA, or waive it altogether.

You can't waive an FHA appraisal on a purchase.

Some common FHA appraisal issues that end up needing to be fixed and reinspected (re-inspections just add to your closing costs, so try to catch it ahead of time) are:

• wire ends not secured properly (cover them with a plate or in a box similar to outdoor outlet covers.
• Flaking or peeling paint. On older homes, there's a risk the home having lead paint. (the peeling paint must be removed and repainted)

Conventional loans aren't exempt from needing repairs, they just have fewer guidelines, so conventional appraisals are seen as less nitpicky.

Underwriting

The way underwriting is handled can be different between FHA and Conventional.

There are a few, but I'll give you one example:

Self employment.

If you are self employed, FHA requires 2 years of self employment taxes for income verification.

Conventional may only require one year of taxes, if you've been in business for 5+ years.