When securing a mortgage loan, you may have been presented with the option of obtaining an FHA loan or a conventional loan—and you may be confused as to which one you should apply for. Both FHA loans and conventional loans can lead you to being able to purchase a home, but the differences between the two types of loans can either save your or cost you money, depending on your individual situation.
Before we break down the requirements for the two types of loans, let’s look at exactly what FHA loans and conventional loans are.
Put simply, an FHA loan is a mortgage insured by the Federal Housing Administration. In general, these types of loans have more lax lending standards and lower down payment requirements, which makes them a popular option among borrowers. Borrowers who have FHA loans pay for mortgage insurance, which protects the lender in the event that the borrower defaults on the loan.
Conversely, a conventional loan is a mortgage that is not guaranteed or insured by a government agency, including the FHA, the Department of Agriculture or the Department of Veterans Affairs loan programs. There are two main types of conventional mortgages: conforming, which follows Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal National Mortgage Association (Fannie Mae) guidelines, and non-conforming, which exceed the loan limits imposed by government-backed agencies. Conventional loans typically offer the best interest rates and loan terms, resulting in lower monthly payments.
What are some of the other characteristics of FHA loans vs. conventional loans?
FHA loans:
- Minimum 3.5% down payment required
- Can go as low as 500 credit score
- Mortgage insurance required for all loans regardless of loan-to-value
- Up front and monthly mortgage insurance payments
- Lower interest rates than conventional loans
- Eligible for streamline refinances
Conventional loans:
- Minimum 5% down payment
- Minimum 620 credit score
- Mortgage insurance required for loans exceeding 80% loan-to-value
- Mortgage insurance can be paid up front, monthly or a split of both
- Interest rates are higher than FHA loans, but monthly payments may be lower
- Can cover much higher loan amounts
Ultimately, conventional loans are only available to borrowers with a good credit score and enough cash required for a down payment—but their advantages are possible lower monthly premiums and faster processing than is possible with a government-insured loan. With any loan you are applying for, make sure you shop around to find the lender offering the best rates and terms for your situation.
For more home-buying tips and advice, continue to follow the Ryan Roberts Realtor blog! For your real estate needs in Auburn, Opelika and Lake Martin, contact Ryan at 334-750-9872, or email [email protected]!