Hello World! Welcome Friends! There’s a lot of talk in the real estate industry of cash buyers swooping in and getting offers accepted. The reality is much different.
The National Association of Realtors said that 87% of homebuyers financed their purchases. People still rely on mortgages to make the American dream of homeownership come true.
If you’re thinking about buying a home, you’re going to come across dozens of home financing products. You’ll hear about FHA loans, conventional loans, jumbo loans, and more.
You should compare the differences between an FHA vs conventional loan. Your mortgage is something you’re going to have for a long time to come.
You better make sure you get the right mortgage product for your needs.
Read on to discover the differences between FHA loans and conventional loans and how you can qualify for the best loan.
What Is an FHA Loan?
FHA stands for Federal Housing Administration. It’s a part of the United States Department of Housing and Urban Development (HUD).
Congress created the FHA in 1934, at the height of The Great Depression. The purpose of the FHA is to insure mortgage loans made by private lenders.
Since the government’s might and resources back the loans, lenders are able to lower the borrowing standards.
That makes it easier to buy a home if you have a low income and limited savings for a down payment.
Types of FHA Loans
There are eight types of FHA loans. Condominium loans help buyers get into a condo building. A 203 (k) loan can deliver funds for a property in dire need of repairs.
There are fixed-rate and adjustable-rate loans. These types of loans refer to the interest rate of the loan.
With fixed-rate loans, the interest rate is the same for the duration of the loan. Adjustable-rate loans have the interest rates adjusted quarterly or annually.
If you took an adjustable-rate loan out last year, you’ll see your payments increase soon because of rising interest rates.
Pros of FHA Loans
The main advantage of getting an FHA loan is that it removes the barriers to homeownership. The credit score thresholds are much lower than with conventional loans.
You can qualify for some FHA loans with a credit score as low as 500.
FHA loans don’t require a 20% down payment, either. With this program, you can get a loan with 3.5% down.
The bottom line is that homeownership is much more affordable with FHA loans.
Cons of FHA Loans
If there’s one disadvantage of an FHA loan, it’s that they require a mortgage insurance premium. This is an additional cost that takes homebuyers by surprise.
A mortgage insurance premium gets paid upfront and monthly. The upfront payment gets paid at closing and is 1.75% of the home loan.
The additional monthly costs depend on how much you borrow and how much you have for a down payment.
It can be anywhere from $500 a year to $5,000 a year. You have to talk to your lender about the mortgage insurance premium and how much it adds to your monthly mortgage payments.
The other potential disadvantage is that FHA loans can only get used to purchase a primary residence. This isn’t ideal if you want to start an investment portfolio with little savings.
You may be able to purchase a multi-family home and live in one of the units as your primary residence. This is something to verify with your lender.
There are often strict qualifications that come with FHA loans. Since the government backs the loan, they have the final say over the type of property you purchase.
For instance, with condo loans, you have to buy in an FHA-approved building with 2 or more units.
What Is a Conventional Loan?
A conventional loan isn’t backed by the government. The lender has to do its due diligence to make sure you can pay the loan back.
That’s why you’ll see higher standards to get approved.
Most conventional loans require a credit score of 700 or above. The down payment requirements usually vary between lenders. Expect to have 7% to 10% ready to put down.
If you do have less than 20% down, lenders will require mortgage insurance.
Conventional loans come in two categories: conforming and non-conforming. Conforming loans comply with Freddie Mac’s and Fannie Mae’s requirements.
The lending requirements are strict, but if you qualify, you have more flexibility. These loans can get used to finance different types of properties.
Buying a second home? A vacation rental? A rental property as an investment? You can finance these purchases with a conventional loan.
How to Qualify for a Home Loan
Now that you know the differences between an FHA vs conventional loan, how can you qualify for a home loan?
Start by getting your documents together. You’ll need to have your recent pay stubs, tax returns, and job information.
Pull a copy of your credit score and bring up the score as much as you can.
Your next step is to shop for lenders. No matter which loan you get, you’re still working with private lending institutions.
They’ll help you find the best loan program for your situation. Compare rates and programs between lenders.
You’ll fill out the application and submit your documentation. Get prequalified because that will make shopping for a home easier.
Comparing an FHA vs Conventional Loan
Buying a home is one of the biggest steps you can take. One of the obstacles in the home buying process is qualifying for a home loan.
The financial industry and federal government have products to make it easier to qualify for a mortgage. Two of the most common ones are FHA and conventional loans.
When you compare an FHA vs conventional loan, you’ll see that one requires a higher credit score and down payment. You’ll also see that it could be harder to meet the strict qualifications.
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