Compare conventional to FHA home loans to see whether FHA mortgage financing might be right for you.
So you’re thinking about buying a home. You ask yourself, “Where do I want to live? What style of home am I looking for? Do I want a new home or an existing home?” While the list of questions likely fills pages, an important question you need to think about is what type of loan are you going to take out for this new home.
But before you can answer this question, you need to understand the similarities and differences of different loans. Here is a comparison of Conventional loans and FHA (Federal Housing Administration) loans broken up into categories.
Conventional– Requires a higher credit score from all parties on the loan. Typically scores 620 and above are preferred for a conventional loan.
FHA– Lower credit scores accepted. Scores down to 580 are generally accepted for a FHA loan. This could help those buyers actively working to increase their credit score qualify to buy a home.
Conventional– Requires a higher down payment, minimum 5% of total home price. However, if you want to avoid paying PMI (private mortgage insurance), minimum down payment is 20% of total home price.
FHA– Lower down payment accepted. Typically, as low as 3.5% of the total home price. FHA also requires upfront insurance premium as well as monthly mortgage insurance premiums (MIP). For FHA loans, the MIP can only be canceled by refinancing to a conventional loan in the future.
Conventional– Higher interest rates.
FHA– Lower interest rates.
Both interest rates are subject to change daily. The interest rate can be locked in at 30, 45, 60, or 90 days, however the longer the lock in period the higher the held interest rate.
Conventional– Owner occupied is not a requirement. If you buy a home thinking it will be used as a rental, a conventional loan is the way to go.
FHA– Owner must live in home during the loan.
Conventional– Only a portion of the down payment can be a gift.
FHA– 100% of a down payment can be a gift.
If you are looking at buying a home right after you get married and want to pay the down payment strictly from the money received as gifts from your wedding, an FHA loan is the way to go.
Advantages and Disadvantages
The main advantages of a conventional loan include no upfront PMI, owner occupancy is not required, PMI cancels itself after the principal balance reaches 78%. The main advantages of a FHA loan include lower credit score required, minimum credit score is 580, and lower interest rates than conventional loans.
The main disadvantages of a conventional loan include significant upfront investment (20% down preferred), credit score of 620 required, and higher interest rates than FHA loans. The main disadvantages of a FHA loan include monthly PMI is higher for FHA than conventional loans, owners are required to live in the home, and MIP required if buyer does not put 10% or higher in down payment.
Since the conventional loans require higher upfront qualifications, first time home buyers typically go with the FHA loan. Spending less cash upfront allows first time home buyers to spend the extra cash on new appliances and other expenses that come with owning a home. Buyers who are looking at their 2,3, 4, or 5th home typically go with the conventional loan. Especially in this market, buyers are able to gain positive equity off their current home to put toward the 20% down needed for the conventional loan. Buyers who are also buying additional properties such as rental homes, tend to go with the conventional loan since the conventional loan does not require the owner to live in the home.
These are just two of many different types of mortgage loans. Consult the knowledgeable, experienced mortgage lenders at Guild Mortgage Tacoma for help choosing the right loan type for you.