Federal Housing Administration (FHA) loans are the best option for first time home buyers, and conventional mortgages are only for established buyers. That statement is false.
These loans have different qualifications and have distinct advantages, and you can’t simplify them like that.
Conventional loans are loans not backed by a government agency.
They are usually funded and serviced by private mortgage lenders.
These include credit unions, financial institutions, and banks. Most conventional loans are conforming loans.
They follow standards set by two prominent organizations:
- Federal National Mortgage Association (Fannie Mae)
- Federal Home Loan Mortgage Corporation (Freddie Mac)
Generally, conventional loans need a high FICO score. This is a three-digit number representing the information of your credit reports.
The higher the number, the better you look in the eyes of lenders. It is a representation of how trustworthy you are when it comes to paying credit.
Most lenders need to have at least a FICO score of 620 for conventional loan consideration. The higher it is, the less interest you’ll pay on the loan.
Conventional loans require a 20% down payment of the total amount of the home you plan to buy.
Some lenders offer lower rates at the cost of getting private mortgage insurance.
Insurance means an annual payment equal to 0.3 to 1.5% of the total loan amount. Most conventional loans will run for 30 years though there are exceptions.
There are other types of conventional loans categorized as non-conforming loans.
This is because they do not follow all standards set by Fannie Mae and Freddie Mac.
Some of these non-conforming conventional loans are as follows:
The Federal Housing Administration limits how much you can loan for a home.
This rate changes every year and has adjustments depending on the county. In 2020, most of the US has a $510,400 limit. Jumbo loans surpass this limit, but the requirements are stricter.
These loans need at least a 700 FICO score. They also need a larger down payment and a low debt-to-income ratio (DTI).
This is to offset the large amount you are borrowing from the lender. Jumbo loans come with very high-interest rates due to the risk involved.
Those who cannot wait for their credit scores to get better opt for a subprime loan.
They allow you to take a conventional loan at the cost of very high closing costs and interest rates.
As the name implies, this loan obliges you to pay a set monthly payment for the loan’s entirety.
Adjustable loans usually have fixed interest rates during the first 3–10 years. Its amount is lower than the market rates.
After the fixed period, the rate will adjust depending on the current rates. This usually means higher total payments.
The Federal Housing Administration insures an FHA mortgage loan. Like conventional loans, you will have to apply through a regular lender.
The difference is that these loans have requirements and have a lot more leniency. This is why many believe the FHA loan is for first-time homebuyers.
While there are lower requirements, it does come at a cost.
Getting an FHA loan means that you will have to pay mortgage insurance for the loan’s entire life. The insurance helps protect the lender against the risk.
This is usually because the down payment is not enough coverage for the loan.
An FHA loan becomes a good option if you don’t meet the credit score requirements.
You can qualify for a loan with a FICO score of at least 500. In this range, the down payment required is 10% of the total home value. If you have a 580 or higher score, the down payment will be as low as 3.5%.
The FHA is also stringent when it comes to choosing a home for the loan. The property will have to undergo a strict assessment.
The home must also be a primary home, and it cannot be used for anything else. Flips, investments, and vacation homes are not allowed.
These loans also offer financing plans for the closing fees. Usually, loans have home buyers to complete all fees when you close on the home.
This can cost thousands of dollars, and not everyone has the money to pay a large sum right away. This financing plan will allow a buyer to pay the fees over an extended period.
Should You Get An FHA Or A Conventional Loan?
Both loans have their benefits and drawbacks. Here is a general overview of what you can expect from each:
- Lower credit score requirements
- Friendlier interest terms
- Option for financing closing fees
- Very strict home appraisal standards
- Mandatory mortgage insurance
- Higher loan limits
- More flexibility
- Low-interest rates (Credit score dependent)
- Higher credit score requirements
- Higher down payment requirements
If you have a high credit score and enough money for a large down payment, then a conventional loan will be the best option. A high down payment means no mortgage insurance payments.
The high credit score will open up lower interest rates.
FHA loans are a lot better for those who don’t have a lot of money saved up for the down payment. It is also an option for those still working on their credit score.
The leniency will give them more breathing room at the cost of higher annual payments.
When it comes to FHA loans vs. conventional loans, it is a matter of circumstance. Depending on your situation, either one can be the best and cheapest option for you. If you have any more questions, do not hesitate to contact us for help.
Figuring out the best move will take professional advice.
To know more about FHA or conventional loans, talk to us at Sprint Funding.