FHA vs conventional loans for your new construction

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One of the biggest decisions you’ll make when starting your home construction journey surrounds which type of mortgage is right for you. Let’s break down the differences between FHA* and conventional home loans, and then review situations that often make sense for each type.

  • Backing: FHA loans are insured by the Federal Housing Administration; conventional loans aren’t.
  • Credit score: FHA requires a minimum score of 500; conventional usually requires at least 620.
  • Down payment: The FHA minimum is 10% (with a 500 credit score) or 3.5% (with a 580 credit score); conventional mortgages have options from 3% to 20%, depending on credit scores and assets.
  • Debt-to-income (DTI) ratio: FHA loans can sometimes be approved for those with higher DTI ratios; conventional loans require a lower DTI.
  • Private mortgage insurance (PMI):** Mandatory for FHA loans; only required for conventional loans when the down payment is less than 20%.
  • 2022 loan limits: Current FHA maximum loan amounts range from $420,680 to $970,800 depending on where you live); top amount for conventional loans is $647,200 for most of the United States, with higher-priced homes requiring a jumbo loan.

Even if your situation doesn’t align perfectly with the scenarios described below, they’re a great starting point for showing what type of buyer benefits from each loan type. Of course, you can always reach out to one of our seasoned mortgage professionals who can help you choose the right loan for your specific needs.

Buyer profile: Young couple or recent graduate(s)

As you’re launching your career, starting a family, or going through another transition, you may not have a significant stash of cash for a down payment, and you’re still building up your credit history. You may also have a decent amount of debt due to college loans, car purchases, and other expenses that pop up in this stage of life.

While your cash flow may not be super high at this point, you’re in a career that enjoys steady income increases, so you expect to be in a better financial situation in the short-term future. Perhaps your partner is still finishing up college and will be on a financially rewarding career path soon.

In this situation, an FHA mortgage could be a good option for you:†

  • Lower down payment.
  • Lower credit score.
  • Higher DTI allowance.
  • Although PMI is required, you can refinance to a conventional loan in the future and ultimately eliminate the monthly PMI portion of your payment.

Buyer profile: Financially stable, but not wealthy

You and your co-borrower earn good money, but don’t have a lot of resources that can be used for a down payment.

You don’t have much debt, you’ve both diligently managed your credit, and your credit scores are above 750. Supply chain issues have made it more expensive to build a home in the community you’ve chosen. Which mortgage makes sense for your purchase?

A conventional loan could be a good choice for your needs:† 

  • Your credit scores and low DTI qualify you for either type of mortgage.
  • You may be approved, even without a large down payment.
  • The higher loan limit gives you more flexibility when making decisions about construction.

Turn to the experts

You might not buy a home every day, but we make things happen for buyers all year long. Count on us to help make your construction mortgage process go smoothly.

*KBHS Home Loans, LLC, is an FHA Approved Lending Institution and is not acting on behalf of or at the direction of HUD/FHA or the Federal government.
**Private mortgage insurance protects the lender. This is different than homeowner insurance that protects the homeowner in the case of fire, theft, etc.
†These recommendations are based on simulated scenarios and are not designed to provide financial or mortgage advice. Consult a mortgage loan officer to determine which mortgage is right for your individual needs.

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