Homeownership is one of your life goals, and you’ve decided that now is the right time to make your move. As a savvy shopper, you know that it’s wise to consider your mortgage options carefully. Both FHA loans and conventional loans are popular options, so taking a close look at them seems like a sensible place to start. What is the difference between FHA and conventional loans?
The Difference Between FHA and Conventional Loans
If you want to explore the difference between FHA and conventional loans, consider how they work. From there, you’ll want to look into what it takes to qualify for the loan, the required down payment, the property standards, and the requirements for mortgage insurance.
How the Loan Works
As Investopedia reports, FHA loans are federally insured loans that are made by private lenders. They’re intended to help borrowers with low savings or poor credit scores become homeowners. The Federal Housing Administration’s guarantee protects lenders, so they’re willing to offer favorable terms to borrowers who might not otherwise qualify. Meanwhile, conventional loans are loans that are not backed by any government agency. They’re also originated by private lenders.
Qualifying for the Loan
According to Money Under 30, qualifying is one of the areas where you’ll see the biggest difference between FHA and conventional loans. To put it simply, FHA loans are much easier to qualify for. FHA loans are available for people with 580 credit scores. In fact, someone with a credit score as low as 500 might be able to secure an FHA loan, depending on the lender. For a conventional loan, you’ll generally need a credit score of at least 620. It’s a similar story for credit-shattering events like foreclosure and bankruptcy. You might be able to qualify for an FHA loan three years after a foreclosure and two years after a bankruptcy. For a conventional loan, you would have to wait at least seven years after a foreclosure and four years after a bankruptcy.
Your Down Payment
When it comes to down payments, how do these two home loans stack up? As Magnify Money explains, it’s pretty close. If you have a credit score of at least 580, you may be able to get an FHA loan with a down payment of just 3.5 percent. However, if your credit score is between 500 and 580, you’ll need a down payment of at least 10 percent to snag a loan. If you opt for a conventional loan, you’ll have to have a higher credit score, but you may be able to get by with a slightly lower down payment. Some conventional loans allow borrowers to come to the table with 3-percent down payments. Remember that all of these requirements vary by lender.
Property Standards
Property standards are another factor to think about. As NerdWallet points out, FHA loans generally come with more rules for the property. For starters, they can only be used to buy a primary residence. In addition, homes purchased with an FHA loan must pass an FHA appraisal, which considers both the home’s value and its safety and structural soundness. In contrast, conventional loans can be used to fund the purchase of a primary residence, investment property, or vacation home. You’ll also have an easier time winning approval for a fixer-upper with this type of financing.
Mortgage Insurance Musts
Mortgage insurance protects the lender in the event of a default. As The Balance indicates, FHA loans and conventional loans take very different approaches to it. With an FHA loan, mortgage insurance is a must for everyone. You’ll have to pay an upfront premium, which can be paid at closing or rolled into your mortgage. Then, there’s a monthly premium that’s paid along with your monthly mortgage payment. This monthly premium never stops. It continues throughout the life of the loan. With a conventional loan, you’ll only need to pay mortgage insurance if you put less than 20 percent down. If your down payment is less than 20 percent, then you’ll pay a monthly private mortgage insurance (PMI) premium when you pay your monthly mortgage payment. However, you don’t have to pay PMI forever. Sometimes, it stops automatically when you reach 78-percent equity. In other cases, you may have to reach out to your lender with a written request for its end.
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Is an FHA loan the right loan for your needs? Would a conventional loan be the better choice? For an expert opinion, reach out to PrimeLending West Texas. Contact us today to discuss your housing goals and discover how we can help you reach them.