FHA Loans Vs Conventional Loans
FHA loan or Federal Housing Administration loan is generally insured by the federal government. In most cases, the first-time homebuyers or especially those who have low credit scores are the ones who mostly qualify for a federal loan. When talking of conventional loans, these loans aren’t properly insured by the governments. Conventional loans, in most cases, are backed by mortgage lenders or private banks, and the borrower has an option to pay all the insurance. Getting a conventional loan in the first place is hard to qualify for and it requires the borrower to have a much high overall credit score. The Conventional and Federal Housing Administration loan or VA loan is a very common home financing option these days. Last year in 2019 alone, almost 75% of all the mortgage loans were of conventional types. In this article let us compare the two and dive deep to get a better understanding of which type of loan is the best.
Conventional Loan Vs. FHA Loan: The Difference
In very simple terms, FHA or Federal Housing Administration Loans are much easier to qualify for and even allows the option for the borrower to have lower credit scores. However, the conventional type of loan requires a lot more including mortgage insurance and larger down payments. Choosing the right type of loan option completely depends on the borrower’s financial needs. Both the conventional and FHA loans offers its customers a long list of pros and cons. Understanding all its pros and cons is very much important such that the loan type completely suits your need.
Conventional Loans: These conventional loans are a very common type of loan, that you can find in the mortgage industry. These loans are either funded by banks or other private mortgage lenders and then sold to different government-sponsored organizations. Conventional loans require rigorous and strict paperwork when compared to its FHA counterpart. A borrower must have a lower DTI or debt to income ratio and a very high credit score in order to qualify for a conventional type of loan.
Benefits Of A Conventional Loan:
- Conventional loans gives the borrower a down payment option as low as 3%.
- In case the borrowers down payment is 20% or more, then he or she can avoid paying PMI or private mortgage insurance.
- Conventional loans give the borrower the freedom to borrow much more than an FHA loan.
- In the case of conventional loans, the mortgage rate of interests are lower than its FHA counterparts.
Is The Conventional Loan The Exact Right Option For The Borrower?
Usually, a conventional loan is just the right option if the borrower has a great credit score and very little debt. Borrower of this loan type can even avoid paying a PMI by paying twenty percent of the loan amount upfront, thereby lowering the mortgage payments. In case, the borrower isn’t able to make a lump-sum payment in the first place, he/she can opt for a down payment as low as three percent. It is seen in most of the cases, that borrowers save a lot of money in the long run with the help of a conventional loan scheme.
FHA Loans: FHA or Federal Housing Administration loan is a typical government agency that helps first time home buyers qualify for a mortgage in cities such as Phoenix, Gilbert, Scottsdale, Tempe etc. The federal housing administration helps in providing mortgage insurance on loans that are approved by FHA lenders. Since the borrowers are mostly protected in case of FHA loans, therefore they can afford to become much more lenient especially when offering mortgages. This type of VA loan can be easily achieved with the help of a much lower credit score than any other loan types.
Benefits Of Getting An FHA Loan
- The FHA VA loans can be easily available at a down payment of 3.5 percent and a credit score as low as 580.
- Anybody can qualify for an FHA loan even after getting bankrupted or after a foreclosure.
- In the case of FHA VA loans, the borrower can use gift money to cover almost the entire down payment amount.
Cons Of An FHA Loan
- The FHA VA loans aren’t available for investment properties or second homes.
- In many parts of the US, the FHA VA loan limits are much lower than that of conventional loans.
- These VA loan option needs the borrower to pay an upfront mortgage insurance premium, that is included in the monthly mortgage payment option.
Mortgage Insurance And FHA Loans
VA loans mortgage insurance is an insurance policy that helps in protecting the lender, in case the borrower is unable to continue with further payments. For the Federal Housing Administration or VA loans, two different types of mortgage insurance need to be done.
Is The FHA Loan The Right Option For The Borrower?
Just because of the lenient credit score requirement and low-down payment option, Federal housing administration or VA loans have become a common option, especially for first-time buyers. This VA loan option is a perfect fit for those borrowers who are in need of lower credit scores in order to get a mortgage.
Apart from all these the FHA VA loans also allows the borrower to refinance the loan without any extra costs. This option helps the borrower to lower the average monthly payments and rate of interest much faster without any income verification or credit check. These VA loans even help in streamlining refinance and also never allows to roll closing cost in case of newer mortgage amount.
In case you are thinking of buying a new property, try considering UrbanHouse Realty. The agents at UHR have years of experience and immense knowledge in all sorts of property acquisitions. No matter if you are a seasoned investor or a first-time buyer, the well-versed team at UHR has all the expertise that can cater to your purchase.