June 27, 2022

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Comparing Mortgages: Conventional 97 Loans Versus FHA Home Loans

Do You Need Down Payment Help?

For low down payment requirements, the FHA mortgage is a home loan that has appealed to a vast number of people. It features a down payment of only 3.5% and has many perks such as no penalty for early payoff of the mortgage.

FHA home loans are government-backed mortgages, which means lower risk for the lender.

That government guarantee means your lender may offer lower FICO score requirements for FHA borrowers–one major benefit of FHA home loans for some is that lower FICO score bar plus the 3.5% down payment requirement.  

But it isn’t the only low-downpayment home loan option; there is a conventional home loan product called the Conventional 97 with an even lower down payment of three percent.

Is this a smarter option than an FHA mortgage? Borrowers should definitely compare the features of these two home loan products and see.

Conventional 97 Loans Compared To FHA Mortgages

FHA loans and Conventional 97 mortgages both include the availability of a 30-year, fixed-rate mortgage for owner-occupiers.

For both types of home loan, there is the ability to apply for a low downpayment, single-family home loan for a typical suburban home, condo unit, planned unit development, or co-op.

The phrase mentioned above, “owner-occupier” is a key factor for both types of mortgage. Occupancy is a requirement and a condition of home loan approval. Terms of occupancy usually entail having at least one borrower obligated on the mortgage occupying the property within a reasonable time after the loan has closed.

FHA Loans Are Different Than Conventional 97 Loans In Some Major Ways

What are the biggest differences between FHA mortgages and Conventional 97 mortgages? The type of home is one–borrowers applying for Conventional 97 mortgages may be limited to single-unit properties.

FHA loans allow single-family purchases for homes with up to four living units. That means that with an FHA mortgage, it is possible to apply for a loan to purchase a four-unit home, with the borrower living in one of the units with the option to rent out the other units and function as a landlord.

FHA home loans require a mortgage insurance premium. There is an Up-Front Mortgage Insurance Premium and one paid monthly as part of your mortgage payment.

This is not private mortgage insurance. Conventional 97s do require private mortgage insurance. The terms and conditions of that insurance will vary depending on the provider and the nature of your loan.

There are important FICO score rule differences too. FHA home loans offer the 3.5% down option to those with FICO scores at 580 or higher. (Lender standards may be higher depending on the lender and other variables). Conventional 97 loans may require FICO scores of 620 or better.

First Time Home Buyers

Some learn that many Conventional 97 mortgages require the borrower to be either a first-time home buyer OR have not owned property in the three years leading up to the mortgage application. How do FHA loans measure up?

FHA home loans will not require you to be a first-time buyer to qualify for a mortgage loan. You read that correctly–FHA loans have NO first-time buyer requirement. Ask any participating lender.

Joe Wallace - Staff Writer

By Joe Wallace

May 5, 2021

Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.

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FHANewsBlog.com was launched in 2010 by seasoned mortgage professionals wanting to educate homebuyers about the guidelines for FHA insured mortgage loans. Popular FHA topics include credit requirements, FHA loan limits, mortgage insurance premiums, closing costs and many more. The authors have written thousands of blogs specific to FHA mortgages and the site has substantially increased readership over the years and has become known for its “FHA News and Views”.

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