When you are in the market for a mortgage, you will soon understand that Federal Housing Administration (FHA) loans and conventional loans are widely popular with homeowners. Before selecting which is right for your current financial situation, it is important to understand the key differences between the two and how those differences will affect you in the long-run.
In 1934, FHA loans were created with the intent of helping more people become homeowners. FHA loans are provided by private lenders, but are insured by the federal government. Through a FHA loan, borrowers who may otherwise be unqualified can still get a loan. If the borrower defaults, the government will take on that cost. These types of loans are especially helpful for borrowers will low credit scores. If a borrower has a credit score of 580 or higher, they can qualify for a 3.5% down payment. The absolute minimum credit score that is needed to qualify for an FHA loan is 500. FHA mortgages offer low interest rates, making it so prospective homeowners with a lower income are able to afford the payments. There is also the option to refinance later on without a home appraisal, income verification, or credit check. While FHA mortgages may seem like the safest bet for first time buyers, especially because the upfront costs can be so low, over time FHA mortgages can actually end up being more expensive than conventional loans.
Unlike FHA loans, conventional loans are provided by private lenders but funded entirely by the borrower. They require higher credit scores to obtain. While the minimum required credit score is 620, the average is around 750. If you decide to go with a conventional home loan, you are able to borrow $424,100. If you are in an area that is high-cost, the limit changes to $625,500. Conventional loans might have higher interest rates but the amount you will pay each month might be lower than what you would pay if you ended up going with an FHA loan. A big advantage of this loan is the flexibility it has. You are able to pay off your loan in a 10-, 15-, 20-, 25- or 30-year term.
Still not sure which type of loan will suite you best? Contact a home finance expert to see if one of them makes the most sense for you.