FHA vs conventional loan

Why: Your credit score is the primary gatekeeper for loan eligibility and determines your interest rate.

How:

• Obtain your credit report from a free monitoring service or your bank.
• Identify your middle score (lenders usually use the middle of three scores).
• Note the 2025 benchmarks: FHA requires 580 for a 3.5% down payment, while Conventional typically requires 620+ for approval.

Done when: You have a confirmed 3-digit FICO score.

Why: Lenders use DTI to ensure you aren't over-leveraged and can afford the monthly payments.

How:

• Add up all monthly debt obligations (car loans, student loans, minimum credit card payments).
• Divide the total by your gross monthly income (before taxes).
• Compare against 2025 limits: Conventional loans usually cap at 43-50%, whereas FHA can be more flexible, sometimes allowing up to 57% with high credit scores.

Done when: You have a percentage representing your current DTI.

Why: The amount of cash you have upfront dictates which loan structure is most cost-effective.

How:

• Total your liquid savings (checking, savings, brokerage).
• Factor in the 2025 minimums: FHA requires 3.5% down; Conventional offers 3% for first-time buyers but 5% is standard.
• Remember to set aside an additional 2-5% of the home price for closing costs.

Done when: You have a specific dollar amount allocated for the home purchase.

Why: Mortgage insurance can add hundreds to your monthly payment and varies significantly between loan types.

How:

• FHA: Includes an Upfront MIP (1.75% of loan) and an Annual MIP (~0.55%) that usually lasts for the life of the loan.
• Conventional: Uses Private Mortgage Insurance (PMI) if you put down less than 20%. PMI can be removed once you reach 20% equity.
• Choose Conventional if you plan to stay long-term and want to eventually stop paying insurance.

Done when: You have decided which insurance structure fits your 5-10 year plan.

Why: If the home price exceeds government limits, you may need a 'Jumbo' loan, which has stricter requirements.

How:

• Check the 2025 Conforming Loan Limit (CLL), which is $806,500 for most single-unit properties.
• Check the FHA floor ($524,225) and ceiling ($1,209,750) for your specific county.
• Ensure your target home price falls within these boundaries for the loan type you prefer.

Done when: You know the maximum loan amount allowed for your area.

Why: FHA loans have stricter safety standards that might disqualify 'fixer-upper' homes.

How:

• Note that FHA appraisers look for specific safety issues (peeling paint, handrails, roof life).
• Conventional appraisals are generally more lenient regarding cosmetic or minor repair issues.
• Choose Conventional if you are looking at homes that need significant immediate work.

Done when: You have matched your loan choice to the type of property you intend to buy.

Why: Lenders require verified proof of income and assets to issue a pre-approval.

How:

• Collect the last 30 days of pay stubs and last 2 years of W-2s.
• Download the last 2 months of bank statements (all pages).
• If self-employed, gather the last 2 years of federal tax returns and a year-to-date Profit & Loss statement.

Done when: All documents are organized in a digital or physical folder.

Why: Rates and fees vary by lender; shopping around can save you thousands over the life of the loan.

How:

• Contact at least three lenders (e.g., a local bank, a credit union, and an online lender).
• Ask for a 'Loan Estimate' for both FHA and Conventional to see the real-world cost difference for your specific score.
• Complete the application within a 14-45 day window to minimize the impact on your credit score.

Done when: You have at least one formal pre-approval letter in hand.

Why: The LE is a standardized document that allows you to compare 'apples to apples' across different offers.

How:

• Check 'Section A' for origination charges (lender fees).
• Compare the 'Annual Percentage Rate' (APR) rather than just the interest rate, as APR includes fees.
• Verify if the loan has a 'Prepayment Penalty' (rare in 2025 but worth checking).

Done when: You have identified the loan with the lowest total cost.

Why: Interest rates fluctuate daily; locking ensures your payment doesn't increase before closing.

How:

• Once you have an accepted offer on a home, instruct your lender to lock the rate.
• Confirm the duration of the lock (usually 30, 45, or 60 days) to ensure it covers your closing date.
• Ask about 'float-down' options in case rates drop significantly after you lock.

Done when: You have a written rate lock confirmation from your lender.