One of the most important steps of buying a home is getting a mortgage! Without a mortgage, you can’t buy a home. Be sure to take your time when deciding on which type of home loan is right for you. The two major types of home loans available today are a conventional loan or an FHA loan.
There are differences with each loan. The best way to decide is to be realistic about your current financial situation, learn the differences of each loan and do a full analysis with a mortgage professional.
The major advantage to selecting an FHA is that easier credit standards must be met to obtain financing. Typically, FHA requires a lower down payment amount, lower credit scores are allowed and, if needed, you can use a non-occupant co-borrower (who is a relative) to help qualify for the loan using blended ratios. Conventional loans also have advantages in certain situations. If you make a 20 percent or more down payment for your home, you will not have to pay mortgage insurance to obtain your loan. An FHA loan -– no matter the amount of down payment — requires an upfront premium and also a monthly premium.
Here’s a quick break-down of the advantages of each loan:
FHA Loan Advantages
- Less down payment required (3.5 percent minimum vs. 5 percent minimum)
- Can go as low as 500 credit score (620 minimum for conventional)
- Not limited to 43 percent for debt-to-income ratio (qualified mortgage rule applies for conventional loans)
- FHA loans are assumable
- FHA loans are eligible for ”streamline” refinances
- Shorter timeframe following major credit problems (3 years vs. 7 years for foreclosure and 2 years vs. 4 years for bankruptcy)
- FHA loans typically will have a lower base interest rate than a comparable conventional loan
- Non-occupant co-borrower (relative) may be used for qualifying by blending ratios
Conventional Loan Advantages
- Mortgage insurance is required for loans exceeding 80 percent loan-to-value (Mortgage insurance is required on all FHA loans regardless of the loan-to-value)
- Conventional mortgage insurance is only monthly or single premium (FHA is upfront and monthly premiums)
- Conventional mortgage insurance will automatically end at 78 percent loan-to-value (FHA will stay for the entire life of the loan)
- Conventional mortgage insurance is credit sensitive (For FHA, one premium fits all)
- Conventional loans can cover much higher loan amounts (FHA over county limits)
- Conventional loans cover more types of loans (FHA doesn’t do investment or second homes)
- Even though conventional loans may have higher interest rates, their monthly payments may still be lower
Summary
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