They say that residential ownership is the bedrock of the American dream. A real estate property under your own name can elicit glorious feelings, and even power. But how does one acquire this reality when the truth people live in can be distant? The economy isn’t exactly kind to everyone, and the idea of owning homes can be but a dream to many.
Luckily, good old loans still exist in the market today, and there are several types you can choose from. Among the most popular ones are the conventional and FHA loans. While both have their own perks and advantages, their differences from each other are enough to divide a sea of people with opposing financial profiles.
Conventional loans are most fitting for people with good credit, as mortgages will demand a FICO credit score of at least 620 to 640. The higher your credit rating, the better. Conventional loans also require much more in down payments compared to federal government-guaranteed mortgages. At least 5% in down payments are required by most lenders when giving out conventional loans. However, should bigger amounts be on the table, a maximum of 20% down payment may be required to close a deal.
Interest rates are generally higher and refinancing will need a credit check with conventional loans, too. At the same time, these loans are not assumable and may allow for fractions of the down payment to be paid through gift funds. Positively, no mortgage insurance will remain required should a borrower be able to put in a 20% down payment or when the loan is paid down to 78% LTV.
FHA loans, on the other hand, are a different kind of beast. As it is, Federal Housing Administration loans are insured by the government and designed for borrowers with credit scores unable to qualify for conventional loans. Meaning, people who resort to FHA loans are usually people who are unable to make massive down payments or those whose credit ratings are below perceived to be low.
One of the more obvious benefits of this loan type, especially for first time home owners, is that only a 3.5% down payment is needed to call a home yours. Granted that you meet the requirements and have a credit rating of at least 580, this shouldn’t be a problem. Those with a credit score of 500 to 579 may still qualify. Contrastingly, they will have to make a 10% down payment.
To add, FHA loans appeal to more people as these are assumable and may allow for 100% of the down payment to be paid through gift funds. Interest rates are also strikingly lower, although Upfront Mortgage Insurance Premium (UFMIP) will be collected all throughout the loan duration.
Minimum and maximum loan amounts are also based off of where your home will be in the country.
FHA mortgage loans are also easier to comply because of the requirements needed. They aren’t as much of a hassle versus ones that are set by conventional loans.
To clarify, the FHA does not release money themselves, but only insures the loan issued by a commercial lender. The receiving end of the loan pays a monthly or yearly mortgage insurance premium to the FHA to have the loan insured. Should the borrower flake for whatever reason, the hazard extended to the lender is minimized. This arrangement is a win-win for both parties involved.
That said, it is still important to note that each loan type has their own sets of advantages over the other, and saying that one loan type is better than the other may be hasty. Regardless of what you choose, fees will be present for both and premium interests will always be part of the picture.
If you feel that conventional loans work best for you, there are hundreds of banks ready to assist you on inquiries and applications. Should you resort to an FHA loan, reviewing your credit score and gathering your requirements is the primary thing to do. Finding an FHA affiliate is secondary.
You may find a lender on hud.gov to help you out on your FHA loan of choice. In the search box that asks for a lender’s name, you may type your city and state if you do not know anyone. It will then present you a list of FHA approved realtors around your area.