Federal Housing Administration (FHA) and conventional (or conforming) home loans have long been the most common mortgage options on the market. But which one is right for you? First, it’s important to clear up a major misconception that an FHA home loan is only for first-time homebuyers. While that’s a myth, it is true is that FHA loans have historically been more attractive to first-time homebuyers due to lower down payment requirements and interest rates. But as you’ll see, the differences between FHA and conventional loans aren’t as stark as they used to be. Nevertheless, nuance matters when dealing with large sums of money, so let’s review some key differences.
Credit score requirement
There’s no question that FHA home loan requirements give buyers more credit wiggle room. This also makes it a clear-cut decision if you have a credit score below 620, as you likely won’t meet the threshold to qualify for a conventional home loan.
20% down used to be the classic standard for conventional loans. Not any longer. Today, qualified buyers are able to pay even less down on a conventional than they’d have to for an FHA loan, although there are still good reasons for paying 20% down if you have the funds.
Both loan types allow gift funds for the down payment (and even other expenses like closing costs), which is significant because gift funds are an important launching pad for many first-time homebuyers.
FHA loans generally offer lower interest rates than conventional loans. However, that difference could be marginal depending on market fluctuation.
Conventional loans have a clear edge here. Mortgage insurance premiums (MIP) are designed to protect the lender if you default on your loan, so there’s no personal benefit to paying them longer than you have to. For each year that you’re required to pay premiums, they’ll cost between 0.5% to 1.0% of your total loan amount.
*Unless you put down 10% or more, in which case mortgage insurance premiums are only required for the first 11 years of the loan term
For more on finding the right mortgage for you, call 866.400.7126 to speak with one of our affiliate home loan officers at HomeAmerican Mortgage Corporation.