If you are obtaining financing for a home purchase, you have more choices than ever when it comes to finding the right type of loan for your situation. Conventional mortgage loans and FHA loans are two of the most popular types of home financing available, and their major difference comes down to insurance — FHA loans are backed by the government, meaning your lender is protected in the case that you default, whereas conventional loans do not provide the same security.
So, as a potential homeowner, what do you need to know about conventional vs. FHA loans? Read on to find out.
The right mortgage makes homeownership a reality.
FHA Loans Give the Lender a Guarantee
Obviously, FHA loans are attractive to lenders — they carry government accountability in the case that you are no longer able to make payments. However, this doesn’t mean that conventional loans require total risk on the part of the lender. Instead, you will be responsible for obtaining and paying for private mortgage insurance (PMI), which will make sure the lender recoups any losses should they happen.
The one case in which you may not have to pay for PMI on a conventional loan is if you are able to make a down payment of 20% or more. This additional amount gives the lender more security in your ability to pay over the long run.
Now, when it comes to FHA insurance, you’re not entirely off the hook with costs. Included in your loan will be a mortgage insurance premium, which is how the FHA is able to make payments in the case of default. Basically, whether you go conventional or FHA, chances are you will be responsible for paying the insurance premiums in one way or another.
Different Qualifying Requirements
Lenders are aware that conventional loans aren’t as well-backed as FHA loans, so the qualification process is more rigorous for the former. At the very least, to qualify for a conventional loan you will need good credit — typically a score of 620 or higher, the ability to make the down payment, and a steady source of income.
On the other hand, FHA loans are meant to extend the opportunity of homeownership to a greater part of the population, so they are far easier to qualify for. Because lenders know they are covered, they can take more of a risk on giving you funding despite your qualifications. If you don’t have great credit — say your score is under 600, or are hard-pressed to come up with a down payment — FHA breaks down the barriers that you may find in private lending.
Loan terms are often more flexible with conventional loans.
Differences in Loan Terms
FHA loans will typically be more favorable to new homeowners because lenders have government security. This means you can have a far lower down payment — as little as 3.5% — and reduced (or even financed) closing costs, taking out some of the additional financial burden that occurs when purchasing a home.
However, FHA loans will have more restrictions on the terms of your loan. For example, they cap the total amount of loan that you are able to receive based on the appraised value of homes in the area. This is meant as a protection for new homeowners, preventing them from taking on a mortgage that is beyond their means to handle. You’ll also only be able to get 15 or 30-year fixed-rate loans with the FHA, whereas conventional financing offers more flexibility with length.
When it comes to obtaining an FHA loan, your process will be the same as with a conventional loan; you’ll need to find a lender and apply based on their requirements. Northpointe Bank offers FHA loans with agreeable terms like only 3.5% down, in addition to a host of available conventional loan options, with some requiring down payments as low as 5%. If you’re ready to take the next step towards owning a home, get pre-qualified for a loan today.