Conventional Loan Vs. FHA Loan
When the time comes to shop for a mortgage, you will be faced with the decision of whether to seek a conventional loan or opt for a loan through the Federal Housing Administration, also called an "FHA loan." In evaluating which loan type is best suited to your needs, you should consider your credit score, how much of a down payment you are able to pay and the price of the home you wish to purchase.
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The Facts
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FHA loans are backed by government securities. Conventional loans, however, are sold to companies on the secondary market. This helps lenders by preventing them from having to hold the loan themselves. Holding loans limits the amount of available funds a lender has to issue additional loans. Government securities are considered to be more stable than the secondary market, thus issuing an FHA loan constitutes a lower risk for a lender than issuing a conventional loan.
Eligibility
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Your credit history should be the first thing you consider when mortgage shopping. FHA loans are easier to obtain in terms of eligibility for borrowers who demonstrate less-than-perfect credit scores. A minimum credit score of 580 will make you eligible for FHA financing. You will need to have a much higher score -- a minimum of 620 -- to qualify for conventional financing. The higher your credit score is, the better your interest rate on the mortgage will be, regardless of which type of loan you ultimately decide on. Other factors that contribute to your eligibility are your employment history and how much debt you currently carry.
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Down Payment
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Conventional loans typically require at least a 10 percent down payment, although certain first-time homebuyers' programs may allow you to pay only 5 percent. Down payments for FHA loans are even less, 3.5 percent. Remember that the more money you put down on a home means the less money you'll have to pay in interest over the life of the loan. Small amounts can add up over the life of a 30-year mortgage. When making a down payment of less than 20 percent on a home that is financed with a conventional mortgage, you will be required to pay private mortgage insurance (PMI). If you get an FHA loan, depending on your down payment level, you may have to pay both an upfront mortgage insurance premium and a monthly mortgage insurance premium.
Price
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The amount of the mortgage you are seeking is another factor to consider. Conventional loans are limited to $417,000 by Fannie Mae and Freddie Mac, the quasi-government agencies that buy mortgages from lenders, although the limit is higher in some high-cost areas. The rules vary depending on where you live, but the maximum financing you can get with an FHA loan is $625,500.
Restrictions
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Government-backed loans, including FHA loans, maintain strict documentation requirements that must be met in order to obtain financing. These loans also have very rigid rules on inspections and appraisals. Conventional loan programs, on the other hand, may be more flexible on these requirements, making it easier to qualify for a loan and easier to work with a seller.
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Comments
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I have been in the mortgage business for 8+ years. I am very familliar with the mortgage process. If you have questions or concerns feel free to give me a call at 866-295-9339 x 777. Ryan Salo Bank Of England. FDIC, Equal Housing Lender.
