Table of Contents
- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
FHA Vs Conventional Loans
When it comes to home buying, there are many new ‘homebuyer assistance’ programs out there, Yet there are many people who are confused about whether to go for FHA or conventional loans.
Both of the loan terms may sound the same when you talk to a lender, they would have similar numbers. It is just that not many lenders would take time to explain the actual difference to you.
So today, we will discuss the pros and cons of FHA Vs Conventional loans.
FHA Loan
FHA Pros:
FHA loan has been popular for a long time. The reason is that their interest rates are ridiculously low. FHA loan is a government-backed mortgage loan.
It is pretty simple, and it is like one credit score fits all kinds of situations. As long as you meet the minimum credit score, you get the same term as everyone.
The minimum credit score that is required by most of the lenders is 600. However, some lenders might get the loan done with a credit score as low as 580. With this FHA loan, you get an option of a minimum 3.5% down payment.
You can make a down payment of more than 3.5% to lower your loan amount and also have more home equity, to begin with.
- Lower interest rates.
- Lower credit score requirement.
- Low down payment requirement.
FHA Cons:
When you opt for an FHA loan, it comes with mortgage insurance. Mortgage insurance is an entity insuring the lender against you.
Meaning if you default on your mortgage, this insurance is going to kick in and give the money to the lender, and then that goes to the government.
In FHA the mortgage insurance is not only a bit higher than a conventional loan PMI but also sticks to the life of the loan. It does not matter when you are paying off the loan.
The Mortgage insurance payment remains the same throughout the life of the loan. The only way it can be changed is by refinancing to a regular conventional loan or by paying off the mortgage.
- Higher mortgage insurance.
- Mortgage insurance remains through the life of the loan.
Conventional Loan
Conventional Pros:
A conventional loan is a mortgage loan that is conforming. This means it follows the guidelines set by Fannie Mae and Freddie Mac.
Technically, the guidelines are very similar to that of FHA with just a slight difference, but it is still a very secured mortgage.
Since the government does not back conventional loans, a lot of things depend upon the individuals qualifying parameters.
Conventional loans favor buyers with a better credit score. Higher the credit score of the borrower better the terms of the loan.
Individuals with a credit score above 700 usually get better interest rates, less mortgage insurance, and overall they get a chance to receive a better package compared to an individual with a credit score lower than 650.
So if you have been very meticulous about your credit score and you took care of it very well, this is an excellent option for you. When it comes to mortgage insurance on a conventional loan, the terms are different.
When you reach the 80 % loan to value for your conventional loan, your mortgage insurance gets booted out and is no longer part of your monthly payment.
- Less mortgage insurance.
- Flexible mortgage insurance terms.
- Borrower centric loans.
Conventional Cons:
With the conventional loan, you would always have a higher down payment. The minimum down payment for a conventional loan is 5 %.
There are very few down payment assistance programs with conventional loans. The interest rates on a conventional loan are higher compared to the FHA loan.
If your credit scores are low, the interest rate on a conventional loan could be higher compared to the FHA loan.
Since conventional loans are not backed by any government department, the guidelines on them are more strict compared to government-backed loans like FHA.
- Higher down payments.
- Higher interest rates.
- Strict guidelines.
Conclusion
FHA vs conventional comparison is an age-old thing that many people do before getting a mortgage. Based on the above information, you should be able to narrow down, which loan program is better for you.
When it comes to comparing FHA vs conventional loan programs, both are exceptional.
However, depending on your situation, you might select one over another. Make sure you speak to your trusted loan officer to get more details about the program that you decide to go along with.
This web site is my breathing in, rattling great pattern and perfect articles.