Conventional 97 vs FHA: Key Differences

Large 2-story house with a three car garageAre you in the market to purchase a home and feeling overwhelmed by the many mortgage options available? Look no further! In this comprehensive comparison, we will explore the nuances of Conventional 97 and FHA loans, two popular choices for first-time homebuyers and those with limited down payment funds.

Understanding the differences between these loan types can be crucial in making an informed decision that suits your financial goals and homeownership dreams.

Here's a comparison of FHA Loans and Conventional 97 Loans:

Understanding FHA Loan Requirements:

  • Down payment: as low as 3.5%
  • Credit score: as low as 580
  • Debt-to-income ratio: as high as 50%
  • Mortgage insurance is required for the life of the loan.
  • No first-time home buyer requirement
  • Upfront mortgage insurance premium: 1.75% of the loan amount

Understanding Conventional 97 Loan Requirements:

  • Down payment: 3%
  • Credit score: typically 620 or higher
  • Debt-to-income ratio: typically no higher than 45%
  • First-time home buyer requirements
  • Mortgage insurance is required until the LTV reaches 78%.
  • Upfront mortgage insurance premium: not required

It's important to note that these guidelines may vary depending on the lender and the specific loan program. It's always best to check with the lender or loan officer for the most up-to-date and accurate information. It's also important to consider your circumstances and which loan program best suits your needs.

Minimum Credit Score Requirements

Conventional 97 Minimum Credit Score

The minimum credit score for a Fannie Mae Conventional 97 loan is 620. A credit score of 620 is considered "fair" and is on the lower end of the spectrum for conventional mortgage loan approvals. However, lenders are permitted to require a higher credit score. As a general rule, a minimum credit score of 640 is required. Remember that having a higher credit score can help you qualify for a lower interest rate and better loan terms and give you more options among different loan programs.

If your credit score is below 620, it may not be easy to qualify for a conventional 97 loan, and you might consider other loan options or work on improving your credit score before applying for a mortgage. It's important to note that guidelines may change over time, and different lenders may have other credit score requirements. It's recommended to check with your lender for the most current credit score requirements and guidelines.

FHA Minimum Credit Score

For an FHA loan, the minimum credit score is 500, with a 10% down payment. However, if the credit score is 580 or greater, the down payment requirement is only 3.5%. FHA financing has more lenient credit requirements compared to conventional 97 loans.

Debt-to-Income Ratio Guidelines

Conventional 97 Debt-to-Income Ratio

The borrower must meet the required debt-to-income (DTI) ratios. Although Fannie Mae does not explicitly state the DTI requirements for a conventional 97 loan, the standard DTI ratio is 43% or lower according to most lenders' guidelines. By dividing the borrower's gross monthly income by their monthly gross debt obligations, the lender determines the DTI ratio.

With a lower DTI ratio, a borrower has less debt overall and is more likely to be able to make loan payments. It's crucial to remember that different lenders may have additional DTI requirements, and some lenders may have more lenient DTI guidelines for particular loan programs like Conventional 97. You should check with your lender for the most recent DTI requirements and procedures.

FHA Loan Debt to Income Ratio

Less stringent credit score requirements apply to FHA loans. Although most lenders prefer to keep the debt ratio at 43% or less, the lender permits a maximum DTI of 57% for FHA loans. FHA loans are better for high-debt-to-income borrowers.

Exploring Loan Type Options

Conventional 97 Loan Type

A Fannie Mae Conventional 97 loan requires a fixed-rate mortgage. This means that the lender will not change the interest rate during the life of the loan, regardless of market conditions, providing the borrower with the security of knowing their mortgage payments for the entire loan term. It makes budgeting and planning for the future easier.

The loan term of a Fannie Mae Conventional 97 loan is 30 years, requiring full repayment within 30 years from the date of disbursement. During this period, the borrower will make fixed monthly payments, including principal and interest. At the end of the loan term, the borrower will fully repay the loan and own the property free and clear.

However, it's important to note that different lenders may have other loan terms and interest rate options; check with your lender for the most current fixed-rate mortgage guidelines and requirements.

FHA Loan Type

The FHA gives the borrower the option of fixed- or adjustable-rate financing. The loan term options for the borrower are 30 or 15 years.

Mortgage Insurance Details

A 3% down payment is required for conventional 97 loans, which are Fannie Mae-backed. However, if the down payment is less than 20%, borrowers must pay for private mortgage insurance (PMI). The cost of PMI varies depending on the borrower's credit score and can range from 0.46% for those with a credit score of 760 or higher to 1.5% for those with a credit score of 620. There is no upfront fee unless the borrower chooses the split premium option.

FHA Mortgage Insurance

Like conventional 97 loans, FHA loans have multiple monthly mortgage premiums based on the term and down payment. However, one of the benefits of FHA financing is that the FHA does not adjust the mortgage insurance premium based on credit scores.

Whether an applicant has a 620 credit score or a 780 credit score, the cost of the MI premium is always 0.55% of the loan amount. This makes FHA financing more beneficial for low-credit-score home buyers and refinancing homeowners. Additionally, borrowers must pay a lump-sum fee at settlement, although this upfront premium can be financed into the loan.

Income Limit Considerations

Conventional 97 Income Limit

The Fannie Mae-offered Conventional 97 loan program has no set income limit.

FHA Income Limit

There is no income limit with FHA loans.

Understanding Loan Limits

Conventional 97 Loan Limit

The Federal Housing Finance Agency (FHFA) has set the 2023 loan cap for a traditional 97 loan at $726,200 in most areas of the United States, while it could be higher in high-cost areas. The borrower must only pay down 3% of this kind of mortgage; the lender will cover the remaining 97%. The loan limit may vary based on where and what property is being purchased. The FHFA will set the maximum loan amount based on the debt-to-income ratio.

FHA Loan Limit

FHA loan limits represent the highest allowable insured amounts provided by the Federal Housing Administration (FHA) for various property types, such as single-family homes and duplexes, within distinct counties across each state. These limits are subject to annual adjustments and depend on local housing market conditions and property categories. They are closely tied to and influenced by the conforming loan limits established by Fannie Mae and Freddie Mac.

See county loan limits.

Conclusion and Considerations

In conclusion, the Conventional 97 and FHA loan programs offer viable options for first-time homebuyers and those with limited down payment funds. While the Conventional 97 may have lower mortgage insurance rates and more lenient credit score requirements, the FHA loan provides flexibility for individuals with lower credit scores or debt-to-income ratios.

Ultimately, these two options will depend on individual financial circumstances and objectives. Prospective homebuyers should carefully evaluate their eligibility and consult a qualified mortgage professional to determine which program best suits their needs. With proper guidance, borrowers can make informed decisions that pave the way toward homeownership.

SOURCE: FHA - HUD Handbook 4000.1 - Fannie Mae: 97% Loan to Value Options - Recommended Reading - FHA vs. Conventional Loans: Which Wins the Mortgage Battle? Requirements for a Conventional 97 Loan 2023 - Pros and Cons of Conventional Loans - Why Choose an FHA Loan Over a Conventional Loan?

FHA - HUD Handbook 4000.1
97% Loan to Value Options
Fas: 97% TV Options

Recommended Reading

FHA vs. Conventional Loans: Which Wins the Mortgage Battle? Requirements for a Conventional 97 Loan 2023
Pros and Cons of Conventional Loans
Why Choose an FHA Loan Over a Conventional Loan?