Home Buying Basics: Conventional vs. FHA Loans

For potential homeowners, especially first-time buyers, deciding what loan to choose can make all the difference in securing a mortgage. This page describes two of the most popular loan types: conventional mortgage loans and FHA mortgage loans. To determine which loan best suits your circumstances, take some time to consider the pros and cons of each and make an educated decision.

The Differences between FHA vs. Conventional

The differences between an FHA loan and a Conventional loan are many, but the differences in value are subjective.

  • FHA home loans are for those with low credit scores and in need of down payment assistance
  • Conventional home loans are for those with a credit score over 720 and over 20% for down payment

FHA Loan Advantages
  • Low Down Payments (3.5% minimum)
  • Low minimum Credit Score (500)
  • New High Loan Limit ($729,750, but determined by county limit)
  • Easy Streamline Refinancing Available
  • Easier Qualification Guidelines
  • Government Provided Down Payment Assistance programs available
  • Available 1-4 unit only
  • Primary Residences only (Can use with 2-4 unit properties if they live in one of the units)

Conventional Loan Advantages
  • No Loan Limit (Non-Conforming Only)
  • All properties accepted (including FHA excluded Complexes & Investment Properties)
  • No Mortgage Insurance Requirement (minimum 20% equity or down payment)
  • Investment Properties allowed without living in any of the units
  • Allow for Loan amounts above $729,750
FHA Loan Disadvantages
  • Lower Rates but higher Mortgage Insurance  for the life of the loan  (MMI)
  • 1.75% Up Front Mortgage Insurance Premium added onto the loan
  • Jumbo Loans = Higher Mortgage Rate (For 625k +)
  • Up Front Mortgage Insurance Premium  Required on ALL loans
  • Not Accepted For Certain Types Of Property
Conventional Loan Disadvantages
  • Higher Rates but lower Private Mortgage Insurance (PMI) that will cease at 80% equity gain
  • Higher Mortgage Rates on Jumbo Loans
  • More Difficult To Qualify For
  • Mortgage Insurance Still Required For 80% + LTV

The main advantage of an FHA mortgage loan is the qualification requirements for borrowers which are usually not as strict as those required with conventional mortgage lenders. A borrower with a lower credit score that would not qualify for a conventional home loan can sometimes secure an FHA loan without any issue. However, FHA mortgage loans are also increasingly popular with borrowers with excellent credit, especially since the loan limits have increased in many parts of the country.

FHA vs. Conventional Loan FAQ 

Who should get an FHA Mortgage Loan? 

Here are a few questions that you might ask yourself to determine whether or not an FHA loan is your optimal choice:

Do I have a low credit score?

One of the major advantages of FHA loans is their lenient credit requirements, which enable borrowers with less-than-perfect credit to secure mortgage loans. Even borrowers who have filed for bankruptcy or undergone a foreclosure may still be able to qualify for an FHA loan, provided credit standing has since improved.

What if I cannot afford a large down payment?

FHA loans provide borrowers with a loan option that does not require a significant down payment. If you are unable to afford putting down a large sum for a down payment, you should consider taking out an FHA mortgage loan, since down payments can be as low as 3.5%.

Will an FHA loan cover the cost of my potential home?

The Federal Housing Administration determines loan limits by relative housing values; there are separate loan limits for every county. If your prospective residence costs more than the maximum limit for an FHA loan, you should consider an alternative.

Who should get a conventional mortgage? 

For borrowers considering a mortgage not insured by the federal government, here are a few questions which you might ask yourself to consider whether a conventional loan would be right for you:

Do I need flexibility? 

While FHA loans do not offer a variety of options when selecting loan terms, conventional loans give borrowers a plethora of options and can consequently be more customized to fit your circumstances. If you would like more freedom as far as loan options go, a conventional loan will provide just that.

How much does my potential home cost? 

Conventional loans limits vary between conforming and non-conforming mortgages. Conforming conventional loans must follow Fannie Mae and Freddie Mac guidelines and thus are limited to $417,000 for single-unit residences. On the other hand, non-conforming loans do not have a loan limit and allow borrowers to secure much larger loan such as a Jumbo loan. Therefore, if the price of the home that you want to purchase exceeds the funds you could secure from an FHA lender or the regional FHA loan limit, you should consider a conventional mortgage.

Can I afford to make a large down payment? 

Conventional loans require a minimum down payment of 3%. However, making a larger down payment can significantly reduce interest rates on mortgage loan offers, thus benefiting those able to afford this option. In addition, borrowers who make a down payment of 20% or more can circumvent Private Mortgage Insurance, further reducing the loan cost.

Do I qualify? 

Conventional loans have more rigid qualifications than mortgage loans secured by the Federal Housing Administration. In addition to requiring a stable income, conventional loans greatly factor in patterns in credit history when determining whether or not to approve a borrower. As such, borrowers with damaged credit should consider other loan programs which may offer better interest rates to low credit borrowers.

Comments

Post a Comment

Popular posts from this blog

Should you buy a home through the seller's agent?

With home prices on the rise and for-sale homes in short supply in some markets, it's no wonder home buyers are looking for an edge. Some think that making an offer through the seller's agent, rather than their own buyer's agent, will save them money and provide an advantage amongst multiple offers. The answer isn't exactly clear since there are both pros and cons to purchasing a home through the seller's agent. Reduced commission? Maybe. Some listing agents will indeed give the seller a break on their commission if there is no buyer's agent, but that's not automatic. Rather, it's solely up to the agent to decide. Some listing agents -- not all, but some -- will offer a discount to the seller if they find their own buyer. In that case, a seller might say, 'I have these (two offers) and one is from my listing agent and one is from a buyer's agent, so instantly, I save maybe 1 percent. That does happen. Sometimes, not all the time. Most agents unde
Read more

Home Buying Basics: 7 terms every homebuyer should know.

As with everything else about real estate, sales contracts or purchase agreements vary from state to state -- and even by real estate company in some places. Variations in regulations place even greater emphasis on working with professionals with local knowledge. While the terms used may change from place to place, there are seven common terms that are particularly important for you to understand. 1. Buyer cost sheet.  Technically, this sheet is not part of the purchase contract, but it's still important. A property purchase agreement can range from a few pages to a dozen or more, depending on your location and the complexity of the transaction. Buyers need to focus closely on the buyer cost sheet, sometimes called "cash to close." The buyer cost sheet -- typically generated by your lender but sometimes given to you by a Realtor -- should include everything you will be responsible for paying when you buy a home. Items included on a buyer cost sheet may include: Insp
Read more