Conventional & FHA - What's The Difference?
When it comes to mortgage products, we pride ourselves in offering a variety of products. Two popular mortgage products are Conventional Loans and FHA Loans. Why are they popular, and what are their significant differences? Let’s explore that together!
Conventional Loans
Conventional loans feature:
3, 5, 10, and 20% down payment options,
Minimum 620 credit score,
A loan limit of $726,200 (subject to change each year),
A choice between fixed or adjustable rates, and
A choice between a 10,15, 20, 25, or 30-year term
Advantages and Disadvantages
Conventional loans are not government-backed loans. FHA, USDA, and VA loans are all federally insured mortgage options. For this reason, these loan products typically feature lower down payment options and more flexible credit requirements because they are taken out at a slightly lower risk to the lender.
Conventional Loans require that the borrower pay Private Mortgage Insurance fees when opting for a 3, 5, or 10% down payment option to negate this risk. If the borrower pays 20% down, or once there is 20% equity in the home, private mortgage insurance can be removed from the loan.
Conventional loans reward borrowers with higher credit scores. The higher your credit score, the better rate you qualify for. These loans typically feature a bit more flexibility because they don’t follow the stringent requirements that government-backed loans have. Conventional loans are also great options for buyers interested in higher-dollar homes because they have higher limits.
FHA Loans
FHA loans feature:
Minimum 3.5% down payment,
Minimum 580 credit score,
A choice between 15 and 30-year terms,
A choice between fixed or adjustable rate, and
Backing by the Federal Housing Administration
Advantages and Disadvantages
The federal backing of FHA loans comes with advantages to the borrower. These loan types are more flexible with credit history, offer favorable interest rates, and feature low down payment options.
However, FHA loans require upfront and monthly mortgage premiums throughout the life of the loan in some cases. Loan limits are determined by the area you’re purchasing in. There are also requirements that the property has to meet to qualify for an FHA loan. Additionally, the home has to be the buyer’s primary residence, it has to be occupied within 60 days of closing, and you have to use an FHA-approved home inspector.
Summary
Conventional and FHA loans are both great options for homebuyers in today’s market. While they offer similar terms and interest rates, they come with different advantages and disadvantages. Is one loan type ultimately better than the other? No. Your loan officer will work with you to determine what loan fits your individual needs and circumstances. They’ll work to find a mortgage product that you’re most likely to get approved for at the best rate possible.
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