FHA or Conventional Loan: Which Is Best?
Making the decision to buy a home is a serious commitment that requires careful planning. One of the most important parts of the process is finding the right financing. After becoming familiar with different types of home mortgages like FHA and conventional loans, it's helpful to know the key differences. Understanding the comparison between the two will determine which is the right fit.
FHA stands for the Federal Housing Administration, which is a division of the U.S. Department of Housing and Urban Development. A loan backed by the FHA has a less rigid qualification process. The interest rate on these loans also tend to be more reasonable. Another plus is a down payment requirement as low as 3.5 percent.
Borrowers can also qualify with a credit score as low as 500. The program even allows builders, lenders, or sellers to cover the closing costs. These attractive benefits are not without some requirements from applicants. Lenders protect themselves against default on the loan, so the FHA requires home buyers to buy mortgage insurance.
Conventional loans normally have fixed payment terms and interest rates. Unlike FHA loans, conventional loans are not insured by a government agency. Borrowers who qualify don’t have to insure loans either. Of the different types of conventional loans, some must meet government sponsored enterprise (GSE) guidelines through Fannie Mae and Freddie Mac.
Borrowers with fair credit may not get some of the breaks they have with FHA loans, but they also don't have to cover some of the costs if they meet certain requirements. Home mortgages are approved with a minimum 680 credit score. With conventional loans, 20 percent down payments waive the requirement to have mortgage insurance.
Both FHA loans and Conventional loans can be useful for different circumstances. In essence, FHA loans help those who have flawed or limited credit. The programs within the loans require effort from the borrower while helping the lenders who are working to restore their credit. Those with a fair credit score and more money to put towards a down payment may find a conventional loan more suitable. If you're wanting to learn more about which loan to pursue for financing your home, stop by Citizen's Bank in Mooresville, IN.