Searching for financial assistance for your new home? There are a handful of mortgage loan options available on the market to help you and your family afford your dream home. Two of the most common home loan options, FHA and conventional, could be the right move for your purchase. Continue reading to learn more about these different types of loans and which one is the right option for you.
A conventional loan is a home loan offered through agencies Freddie Mac or Fannie Mae, as opposed to being offered directly from the government. Many homeowners prefer conventional loans because of their low down payments of just 3%. However, for homeowners who are able
to put down a 20% down payment on their conventional loan, they can receive the benefit of not having to pay a monthly mortgage insurance payment. While FHA loans require a mortgage insurance payment at closing, conventional loans do not. Agencies Freddie Mac and Fannie
Mae understand that all homebuyers have different financial situations, so this type of home loan allows homebuyers to choose the repayment plan they prefer, from paying within 8 years up until 30 years.
However, there can be some downsides to applying for a conventional loan instead of an FHA loan. For homebuyers with a less-than-stellar credit score, it might be difficult to get approved for a conventional loan. This type of loan generally requires a credit score of at least 620. Conventional loans also require homebuyers to have a DTI (debt-to-income ratio) lower than 50%. While these requirements could deter some, for homebuyers with an excellent credit score and a low debt-to-income ratio, applying for a conventional loan could be the right decision.
FHA loans are directly backed by the government, through the Federal Housing Administration. These loans are perfect for homebuyers whose credit scores don’t make the cut for a conventional loan. The FHA allows homebuyers to be approved for a loan with a credit score of just 580. For FHA loans, homebuyers still need to prove a low DTI, but it allows more leniency for buyers with lower credit scores.
A slightly higher down payment is required for an FHA loan. Homebuyers will need to be able to pay at least a 3.5% down payment in order to qualify. If they choose to pay the minimum down payment, monthly insurance payments will be required for the length of the loan. However, if the homebuyer is able to put a 10% down payment down at time of closing, they will only need to pay insurance payments for the first 11 years. An FHA loan will not offer the same amount of flexibility as a conventional loan, but for homebuyers who are willing to pay mortgage payments for 15, 20, 25+ years, an FHA loan could be the best financial option.
Whether you’re financially able to put down a large down payment on a mortgage or are looking to pay the minimum, an FHA or conventional loan can help you afford your new home. For those looking for more flexibility, a conventional loan is a good option. However, this type of loan requires the borrower to be in better financial standing than an FHA loan does.
We’re happy to answer any questions you may have about to mortgage loan application process. For more information on FHA loans or conventional loans, click here to give our team a call.