FHA OR CONVENTIONAL LOAN
Posted by Marty Snyder on Thursday, April 7th, 2016 at 8:24am.
House Hunting – FHA or Conventional Loan?
As new home buyers hit the market scouring the internet for homes it’s a matter of time before questions are posed “FHA or conventional? and “What home loan is best for me?”
There are many types of home loans, some of which are for specific types of properties or specific types of eligible buyers, VA for instance.
By far the most used, FHA and conventional loans both have upsides and downsides.
Which one you chose will depend on your market and the homes you’re looking into, personal goals for a residence, your finances and from different perspectives – your credit.
Other things you’re going to want to consider as you review these home loan types, is how much you want to pay over the long haul and whether or not you’re buying a home that needs repairs.
Let’s take a brief look at each and how they may apply to you, draw the primary distinctions and compare the features of each.
Please understand, mortgage program rules and guidelines change like the wind, so it is best that you direct any specific questions or concerns directly to a mortgage professional. They have the proper training and education to best answer any questions. But, for the purpose of this article, I’d like to point out a few tips and pointers that you might find to be helpful.
Weighing FHA or Conventional Home Loans
FHA loans – As of this post, the typical FHA loan requires that a borrower put down 3.5% on the loan and the borrower is required to pay PMI. (private mortgage insurance)
The home should be “move-in ready” meaning that it is to be considered “habitable” without requiring any repairs.
What does this mean? All appliances that are included in the transaction must be in proper working order; no peeling paint, especially if the home was built on or before 1978; the heating and a/c must be in proper working order; all plumbing must be in-tact with no notable leaks; the electrical system of the home must be on and working correctly; and, no broken windows in the home. These are not all of the requirements, but I think it will help you get the idea.
Conventional loan – The down payment requirements for these types of loans vary greatly. Many home buyers automatically think that a conventional loan requires at least 20% down payment. This is simply not true. Some of the lenders that we work with can extend a conventional mortgage with as little as 3% down. (notice this is .5% less down than the minimum for FHA)
In most cases, unless you put down 20% on your home purchase, you will be required to pay PMI. BUT, even if putting less than 20% down, the monthly percentage of PMI charged can sometimes still be less costly than with an FHA product. The percentage of PMI charged is on a graduating type scale.
Got 5% to put down and don’t want to pay PMI? I know of several lenders that can assist you with this, but, don’t expect something for nothing. Even though these 5% down payment loans can be without PMI, that doesn’t mean the bank won’t try to make it up by charging you a slightly higher interest rate than normal. But yet, some folks love these options.
Another important thing to remember. No matter which loan product you decide to use, the minimum credit score requirements can vary from lender to lender. Although all lenders must be held accountable to Federal guidelines, some institutions are able to carry more risks than others and may even keep their loans “in-house” which means that just because one lender tells you “no” does not mean they all will!
Lastly, to clear up one of the myths that exist. Just because you might be able to buy a home with a conventional loan product does not necessarily mean that a conventional appraisal is an automatic win for you over what an FHA appraisal might be. Conventional appraisals still require a lot of similar things about the home that an FHA does, but albeit tend to be less strict in the requirements.
You may have noticed that I did not talk about minimum credit score requirements. That is because they change so often, what might work today might not work tomorrow as well as the opposite. For example, currently some of our lenders can extend a mortgage to someone that has a score in the 580 range, but, that could change tomorrow.
We work with a variety of lenders that can cover basically any type of loan that you are looking for as well as a variety of programs, down payment amounts, most credit scores etc.
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