What Is the Difference Between Conforming & FHA Mortgages?
A home mortgage is a loan used to purchase or finance a residential property. The property itself is the collateral on the debt. There are numerous types of mortgages available in the market, however; two common options are conforming and Federal Housing Administration, or FHA, mortgages. While each option has its benefits, each is distinctly different. Do your research and consult your mortgage lender to help you make the right decision for your next mortgage.
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Conforming Mortgages: Basics
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A conforming mortgage is a mortgage underwritten by either Fannie Mae or Freddie Mac. This type of mortgage is the most basic and common mortgage on the market, as of 2011. While each lending institution has its own rules and regulation, in most cases this type of mortgage requires a credit score of above 680 with a down payment of 20 percent. If a borrower has less than a 20 percent down payment, a fee known as private mortgage insurance, or PMI, must be levied against the borrower. This fee is charged monthly in addition to the mortgage payment, in most cases, and protects the lender in the event of the borrower's default.
FHA Mortgages: Basics
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An FHA mortgage is a government backed mortgage underwritten by the Federal Housing Administration. This mortgage program was created to help borrowers with low downpayments and lower credit scores to be able to purchase a home. Depending upon the state of purchase, the minimum down payment for a FHA mortgage ranges between 3.5 and 5 percent. Additionally, a minimum credit score of 620 is required.
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Conforming vs FHA Mortgages
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A borrower's interest rate is based upon numerous factors, although his credit score is the biggest indicator of his interest rate. The lower a borrower's credit score is under 720, the higher the borrower's interest rate will be. However, the increase in interest rate is less significant for a FHA mortgage than a conventional mortgage. For example, a borrower with a 680 credit score may have an interest rate of 4.5 percent with an FHA mortgage and a 5 percent interest rate with a conventional mortgage.
How to Decide Which Option is Best For You
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Typically, borrowers with a bigger down payment and higher credit score will choose a conventional mortgage over a FHA mortgage. In most cases, a FHA mortgage has higher closing costs than a conventional mortgage. A FHA mortgage is typically more beneficial to borrowers with lower credit scores and down payment. In those cases, the higher fees allow a borrower to purchase a home that would not be otherwise possible.
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References
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