If you’re looking to buy a home or refinance your existing home, you’re probably looking at all the options and trying to figure out which loan is best for you. There are definitely a lot to choose from, but frequently people ask us what the difference is between an FHA loan versus a conventional loan? Unless you’re military, you’re probably looking at these two options.
There are two types of Conventional Loans: conforming and non-conforming. Conforming loans have conditions and terms dictated by Freddie Mac and Fannie Mae. They both have guidelines that direct the maximum loan amount, borrower income, credit score requirement, and down payment necessary. Any loans that are above the maximum loan allowance set by Frannie Mae and Freddie Mac are considered non-conforming loans, aka, Jumbo Loans. Due to the fact that they don’t occur as often, jumbo loans tend to have a higher interest rate, comparatively.
One perk of a conventional loan is the potential to avoid PMI (private mortgage insurance). Private Mortgage Insurance is required if you owe more than 80% of your home value. If you have a down payment of 20% or more, you don’t have to pay PMI. Most noteworthy, if you have a credit score of 720 or higher, the conventional loan will likely have a lower interest rate.
An FHA loan is one that is insured by the Federal Housing Administration. The FHA isn’t the lender, they just guarantee it. Consequently, the lender doesn’t take on the financial risk of the loan. And because the FHA is insuring the loan, FHA loans don’t typically mandate as high of a credit score as a conventional loan. Another perk of an FHA loan is that the rates and upfront costs are significantly lower than conventional loans. Sound too good to be true? Wondering why everyone doesn’t go the FHA route? Here’s the flip side: FHA requires mortgage insurance for the life of the loan. You pay a portion of the premium at closing (rolled into the loan), as well as, the annual premiums in monthly installments.
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Still have questions or don’t know which option will best suit your needs? Don’t hesitate to reach out, we’re always here to help! Give us a call today and we’ll walk you through the best choice!