For potential homeowners, especially first-time buyers, deciding what loan to choose can make all the difference in securing a mortgage. This page describes two of the most popular loan types: conventional mortgage loans and FHA mortgage loans. To determine which loan best suits your circumstances, take some time to consider the pros and cons of each and make an educated decision.
The differences between an FHA loan and a Conventional loan are many, but the differences in value are subjective:
FHA Loan Advantages
Conventional Loan Advantages
FHA Loan Disadvantages
Conventional Loan Disadvantages
The main advantage of an FHA mortgage loan is the qualification requirements for borrowers which are usually not as strict as those required with conventional mortgage lenders. A borrower with a lower credit score that would not qualify for a conventional home loan can sometimes secure an FHA loan without any issue. However, FHA mortgage loans are also increasingly popular with borrowers with excellent credit, especially since the loan limits have increased in many parts of the country and the downpayment required is lower.
Here are a few questions that you might ask yourself to determine whether or not an FHA loan is your optimal choice:
One of the major advantages of FHA loans is their lenient credit requirements, which enable borrowers with less-than-perfect credit to secure mortgage loans. Even borrowers who have filed for bankruptcy or undergone a foreclosure may still be able to qualify for an FHA loan, provided credit standing has since improved.
FHA loans provide borrowers with a loan option that does not require a significant down payment. If you are unable to afford putting down a large sum for a down payment, you should consider taking out an FHA mortgage loan, since down payments can be as low as 3.5%.
The Federal Housing Administration determines loan limits by relative housing values; there are separate loan limits for every county. If your prospective residence costs more than the maximum limit for an FHA loan, you should consider an alternative.
For borrowers considering a mortgage not insured by the federal government, here are a few questions which you might ask yourself to consider whether a conventional loan would be right for you:
While FHA loans do not offer a variety of options when selecting loan terms, conventional loans give borrowers a plethora of options and can consequently be more customized to fit your circumstances. If you would like more freedom as far as loan options go, a conventional loan will provide just that.
Conventional loans limits vary between conforming and non-conforming mortgages. Conforming conventional loans must follow Fannie Mae and Freddie Mac guidelines and thus are limited to $417,000 for single-unit residences. On the other hand, non-conforming loans do not have a loan limit and allow borrowers to secure much larger loan such as a Jumbo loan. Therefore, if the price of the home that you want to purchase exceeds the funds you could secure from an FHA lender or the regional FHA loan limit, you should consider a conventional mortgage.
Conventional loans require a minimum down payment of 5%. However, making a larger down payment can significantly reduce interest rates on mortgage loan offers, thus benefiting those able to afford this option. In addition, borrowers who make a down payment of 20% or more can circumvent Private Mortgage Insurance, further reducing the loan cost.
Conventional loans have more rigid qualifications than mortgage loans secured by the Federal Housing Administration. In addition to requiring a stable income, conventional loans greatly factor in patterns in credit history when determining whether or not to approve a borrower. As such, borrowers with damaged credit should consider other loan programs which may offer better interest rates to low credit borrowers.
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