Whether you’re looking to buy a new home or refinance your current one, there are many loan options available on the market. Two of the most popular options are conventional and FHA loans.
Both types of loans have their positives and negatives. With that in mind, we thought we would discuss which loan is right for you. We’ll go over what they are as well as the pros and cons of each.
Conventional loans are sometimes referred to as agency loans. They have a variety of unique attributes that set them apart from FHA loans.
What’s a Conventional Loan?
Conventional loans are mortgages offered through Fannie Mae or Freddie Mac. Rather than being directly backed by the government, Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs).
Pros of a Conventional Loan
There are several benefits to a conventional loan.
Conventional loans offers some of the lowest down payments available, letting you get into a home with as little as 3% equity paid upfront. This also works to your advantage in cases where you don’t need very much equity if you see an opportunity to lower your rate and/or change your term.
If you make a down payment of 20% or more, there’s no monthly mortgage insurance. Not everyone has that kind of savings built up, so it’s also good to know that once you reach 20% equity, mortgage insurance payments can be removed as long as you’re current on your loan and meet a couple of other conditions. Unlike other loans, including FHA, there’s no mortgage insurance payment at closing.
Monthly mortgage insurance payments can be avoided by taking a look at a lender-paid mortgage insurance (LPMI) option like PMI Advantage . When a client chooses an LPMI option, the lender pays for mortgage insurance upfront in exchange for the client taking a slightly higher interest rate.
Finally, you also have some flexibility in terms. With a conventional loan, you can select any repayment period between 8 and 30 years.
Conventional loans can be used to buy primary residences, vacation homes and investment properties that are anywhere from one to four units.
Cons of Conventional Loans
There are a lot of good things, but conventional loans aren’t without their disadvantages. Let’s go over a couple.
In order to get a conventional loan, you need a credit score of at least 620. This is in contrast to the requirements for an FHA loan, which we will discuss below.
You’ll also need a lower debt-to-income (DTI) ratio . DTI is a measurement of how much of your monthly income goes toward making payment on your debts, including student and personal loans, housing and credit cards. In no case should your DTI be above 50%. Ideally, it should be lower for better loan terms and the best chance of approval.
Now that we’ve gone over conventional loans, what’s the deal with FHA loans? Glad you asked!
What’s an FHA Loan?
FHA loans are backed by the Federal Housing Administration, a government agency. They have some significant advantages and disadvantages when compared to conventional loans.
Pros of FHA Loans
There are a couple of big benefits of FHA loans that make it easier for clients to qualify.
The first major benefit is that otherwise well-qualified clients can get a loan with a credit score of as low as 580. In order to make that happen, you need to show a lower DTI, but it does mean options for clients with less-than-perfect credit.
If you have a higher credit score, in certain instances you may be able to qualify with a higher DTI than you could on a conventional loan. This could help allow some flexibility in financing.
Cons of FHA Loans
Just as with conventional loans, there are cons to FHA loans as well.
Although it’s still low, you do have to make a slightly higher minimum down payment of 3.5%.
If you make the minimum down payment, you’ll have to make monthly mortgage insurance payments for the life of the loan. If you make a down payment of 10% or more, you pay mortgage insurance for 11 years.
The good news is you can refinance into a conventional loan if you qualify once you reach 20% equity so you can get rid of mortgage insurance payments.
In addition to the monthly mortgage insurance payment, there’s an upfront mortgage insurance premium. If you make the minimum down payment, this is equal to 0.85% of the loan amount. This can be financed into the loan.
FHA loans don’t offer quite as much flexibility in terms of loan terms, but you still have 15-, 20-, 25- and 30-year options.
Finally, you can only use FHA loans to get a one- to two-unit primary property. Second homes and investment properties are conventional only.
Hopefully, this has helped you decide which loan is right for you. If you’re ready to get started, you can do so online through Rocket Mortgage ® by Quicken Loans . If you’d rather get started over the phone, give us a call at (888) 980-6716. Still on the fence? We can help answer your questions in the comments below.
The post Conventional or FHA Loans: Which Is Right for You? appeared first on ZING Blog by Quicken Loans .