Is an FHA or Conventional Loan Right For You?
Deciding which mortgage loan will best help in buying your first home overwhelms most people. As a first time home buyer, you need to understand your options and know what type of loans you qualify for.
Most people narrow it down to find themselves comparing FHA and conventional loans. We want to help.
Read on for help in deciding whether FHA or conventional loans are right for you!
Conventional Loan vs. FHA Loan
Let’s look at the differences between the two loans, the pros and cons of each, and the qualifications necessary to borrow each loan.
What Is a Conventional Loan?
A conventional loan is a home mortgage that the FHA and other government agencies do not back, leaving the lender unprotected in case of default.
What Is an FHA Loan?
An FHA loan is a type of home mortgage that a government sector, called the Federal Housing Administration (FHA), backs to protects lenders in the case that the borrower (you) defaults.
Comparing FHA and Conventional Loans
Each loan provides a unique set of advantages and disadvantages that you need to understand to choose which loan is right for you. Let’s break them down by category.
Due to the government backing protecting the private FHA-approved lenders, homebuyers can obtain an FHA easier than a conventional loan. For instance, they accept credit scores as low as 580, whereas conventional loans require a score of 620 or higher to qualify.
Before going any further, let’s clear up an important term that helps determine down payment. LTV stands for loan-to-value ratio and typically indicates the portion mortgaged compared to your equity (what you own.)
Conventional loans only require only 3% down payment for 97% LTV loan and allow downpayment gifts if you qualify, but require anywhere from 5%-20% down and do not allow gifts if you do not. FHA loans only require 3.5% down and allow gifts on the downpayment.
Due to the lender protection, FHA requires an upfront mortgage insurance, and this insurance payment lasts the entire life of the loan if putting less than 10% down. A conventional loan, on the other hand, does not require an upfront insurance payment and payments for the private mortgage insurance (PMI) cost .34% less than those with an FHA loan. Furthermore, the PMI ends when 78% of the conventional loan is paid.
The interest rates for conventional loans are higher than those for FHA loans.
FHA loans come with stricter limitations than conventional loans. They only allow the loan to go towards FHA approved housing, while conventional loans do enforce housing restrictions.
Also, FHA loans typically allow a significantly smaller loan value. However, the limit does increase for homes in more expensive areas.
Which Is Better, FHA or Conventional Loans?
The answer to this question depends on your needs and qualifications. Each type of loan offers both advantages and disadvantages, so you need to decide which suits your situation best. However, first time home buyers generally find the FHA loan more beneficial due to the smaller downpayment and lower credit requirement.
Calculate Your Mortgage to Help You Decide
A mortgage loan will follow you for many years to come. So, even as a first-time buyer, you should understand home mortgage loans like an old pro.
To help you make this important decision in choosing FHA or conventional loans, calculate your Mortgage to see what you can afford. Take the lead in your home buying experience, so you never feel dragged.
He is an experienced presenter on affordable housing topics including FHA, VA, and conventional home loan programs.
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