Buying your first home, or even your second home can be very confusing. There are many different types of home loans available and without proper guidance, its hard to understand which type of loan is best for you. FHA, which stands for Federal Housing Administration, and conventional loans are the two most popular types of home loans. They both have benefits and drawbacks to consider before deciding which is best for your situation.
Qualifications
According to the website Broker Outpost, the qualifications for conventional and FHA loans are similar, yet FHA loan qualifications are generally more lenient. Potential borrowers who do not qualify for conventional loans because of credit scores below 620 may qualify for FHA loans. Neither FHA nor conventional loans require that the borrower be a veteran like VA loans do. FHA and conventional loans look at things like credit score, debt and current income to qualify a borrower, though the standards are slightly lower for FHA loans.
Typical Terms
Bank Rate explains that there are three main types of FHA loans with different terms. FHA 203 b loans have fixed interest rates and 15- or 30-year repayment periods. FHA 251 loans have adjustable rate mortgages. There is also an FHA buy down loan were the interest rate is decreased by the amount of money the borrower puts as a down payment. Conventional loans can have fixed or adjustable interest rates and typically have repayment periods of 15, 20 or 30 years.
Loan Assurance
According to Bank Rate, FHA loans are guaranteed by the Federal Housing Administration. This means that the lender does not take on a financial risk when giving someone an FHA loan because it is backed by the Federal Housing Administration. Conventional loans are not guaranteed or assured by any agency, which is why the typically require larger down payments.
Down Payments
The website Saving to Invest states that the mandatory down payment on most conventional loans is about 20 percent. FHA loans typically require the borrower to put 5 percent down on the house, and sometimes require as little as 3.5 percent down payment. The down payment on conventional loans is significantly higher than the down payment made on most FHA loans.
Private Mortgage Insurance
Private mortgage insurance is a reoccurring monthly payment made by the borrower as a means of securing the loan. Conventional loans usually do not require any private mortgage insurance because the borrower puts about 20 percent of the loan amount as a down payment. FHA loans usually require the payment of private mortgage insurance, which can be up to several hundred dollars each month.
Member Comments