Do You Need a Conventional or FHA Loan? What makes them different?
When it comes to buying a home, your options for financing aren’t limited. Between conventional home vs. FHA loans, you can choose the one that best fits your situation. But what’s the difference? In this article, we will explore the differences between FHA and conventional home loans.
We will explain eligibility criteria, credit score requirements, and other essential factors to consider when choosing between the two. When it comes to home loans, there are two main types: conventional and FHA. But what is the difference between FHA and conventional home loans?
Another difference is that conventional loans typically require a higher down payment than FHA loans do. The minimum down payment for an FHA loan is 3.5%, while the minimum down payment for a conventional loan is 5%.
Lastly, credit requirements are generally stricter for conventional loans than they are for FHA loans. For an FHA loan, you can have a lower credit score and still be eligible for the loan. However, with a conventional loan, you will likely need a higher credit score to qualify.
What is an FHA Home Loan?
The FHA loan program is one of the most popular home financing options for first-time and low-to-moderate-income homebuyers. An FHA loan is a standard mortgage that’s insured by the Federal Housing Administration.
This government backing protects lenders from borrowers who might not be able to make their payments, and as a result, makes it possible for lenders to offer loans with lower interest rates and down payment requirements. That’s why FHA loan vs first-time home buyers, gives them a possibility to get better terms.
An FHA loan offers a lot of advantages since it can be used to purchase a home or refinance an existing mortgage. So, what are the benefits of this loan?
For one, you can put down as little as 3.5% for an FHA loan, which means you can buy a home sooner than you could with a conventional loan. Additionally, FHA loans have more flexible credit requirements than conventional loans, making them easier to qualify for.
And if you were wondering why sellers don’t like FHA loans, it’s because they have much more benefits to the borrower than for them. Also, the seller limit with this type of loan is much lower than with a conventional loan.
What is a Conventional Loan?
A conventional home loan is a mortgage that is not backed by the government. These loans are available through private lenders and are not insured by the Federal Housing Administration. Conventional loans may be either conforming vs. non-conventional. These loans can be used to purchase a primary residence and are good for first-time home buyers, a second home, or an investment property.
The length of the term can vary from 10 to 30 years. The most common terms are 15 and 30 years. The advantages of a conventional loan come in monthly payments during the life of the loan are amortized, meaning that each payment goes towards both principal and interest. At the end of the loan term, the remaining balance is due in full.
Conventional loans require a minimum down payment of 5%. However, you may be able to qualify for a conventional loan with a down payment as low as 3% if you have private mortgage insurance (PMI). PMI is insurance that protects the lender in case you default on your loan. The annual premium for PMI is typically between 0.5% and 1% of the loan amount.
Also, many people wonder if a home inspection is required for a conventional loan and if are there any requirements for it. Well, the answer is yes, conventional loan home inspection is mandatory.
Comparison between FHA and Conventional Home Loans
An FHA home loan is a mortgage insured by the Federal Housing Administration. A conventional home loan is a mortgage that is not insured by the federal government. Both types of loans have their pros and cons.
Here are some of the main differences between FHA and conventional home loans:
- Down payment – You can get an FHA loan with as little as 3.5% down. With a conventional loan, you will need at least 5% down.
- Credit score – For an FHA loan, your credit score can be as low as 580. For a conventional loan, you will need a credit score of 620 or higher.
- Mortgage Insurance – If you get an FHA loan, you will be required to pay mortgage insurance premiums. With a conventional loan, you may be able to avoid paying mortgage insurance if you put down 20% or more when you purchase your home.
Should I Use a Conventional Loan?
A conventional loan is a good option if you have a strong credit score and can afford a down payment of at least 3%. You can also get a conventional loan with a lower interest rate if you have a strong credit score and pay private mortgage insurance (PMI) premiums.
On top of that, a conventional loan is the most popular type of mortgage in the United States. In fact, conventional loans accounted for roughly 80% of the home loans that closed in August 2021.
Another thing many people ask is whether it is possible to switch from FHA to conventional before closing. Well, the answer is both yes and no. In some cases, the lender can approve the change while in some it’s not possible.
Overall first-time home buyer vs conventional loan is a great combination and there are many benefits to using one.
Should I Use an FHA Home Loan?
An FHA home loan is a mortgage that is insured by the Federal Housing Administration. This type of loan is often a good option for first-time homebuyers or buyers with less-than-perfect credit, as FHA loans have more flexible qualification requirements than conventional loans.
However, there are also some drawbacks to FHA loans to consider before deciding if this is the right type of mortgage for you. For example, FHA loans require borrowers to pay both upfront and annual mortgage insurance premiums, which can add to the cost of your monthly mortgage payment.
Additionally, because FHA loans are government-insured, if you default on your loan, the government will pay your lender back. This could mean that you end up owing more money to the government than you would if you had used a conventional loan.
If you are not quite ready for a conventional loan or worried about qualifying, an FHA loan could be a good way to get into homeownership. Also, you can get an FHA loan for a second home.
When it comes to buying a home, it might be a hard choice to choose the best loan for yourself. Both conventional and FHA loans are great opportunities to get the needed funding but they do differ a lot.
Because of that, we have made this article to help you understand them both better. And if you are in the market for a new home, you will find all the needed information here to make the best decision. So, we hope that you in the end find your dream house.