Conventional vs. FHA Loans | Apopka FL Home Mortgage Tips
Conventional and FHA loans are the two major types of loans used by home buyers. If you’re new to home financing, it may be helpful to understand the major differences between these two loan products. Knowing the pros and cons of each will help you decide between conventional vs. FHA loans for your next Apopka FL home purchase.
Overview of FHA Loans
Benefits of FHA Loans
FHA loans are popular with first time home buyers because the qualification terms (such as credit scores and debt to income ratios) are generally more lenient than other loan programs. With FHA loans, buyers can put as little as 3.5% down. More importantly, that down payment money can be gifted from a family member. FHA loans can actually be assumed in a home sale,… which could be a selling feature should mortgage rates increase dramatically in the future. FHA also offers a streamline refinancing option which eliminates the need for an updated appraisal. These are all very beneficial features, especially for first time home buyers.
Disadvantages of FHA Loans
The major disadvantage of FHA financing has to do with some of the costs. PMI, which is normally required on loans for more than 80% of the purchase price, are due as a lump sum at closing and every month as part of the mortgage payment. PMI remains intact for the life of the loan, even once you’ve paid it down below the 80% mark. Additionally, PMI rates on FHA loans are often higher than conventional loan products.
Overview of Conventional Loans
Benefits of Conventional Loans
Conventional loan terms and rates often vary depending on a buyer’s specific credit score and debt-to-income ratios. Some conventional loans require as little as 3% down. Unlike FHA loans, conventional loans have no up-front mortgage insurance (MI) premium due at closing. MI is only due monthly and eventually disappears once a loan is paid down enough. There may even be options with no monthly MI premium, in exchange for a slightly higher interest rate. In many cases, interest rates may be slightly higher on conventional loans, compared to FHA loans, but home buyers end up paying less each month due to the lower MI rates.
Disadvantages of Conventional Loans
The disadvantage of conventional loans has mostly to do with the qualification criteria. Most do not allow gifted money to be used for down payments. Credit score requirements are generally higher as well, compared to FHA loans. For these reasons, conventional loans are historically used by home buyers who have good credit history and finances.
Conventional vs. FHA Loans, Which Is the Better Option
Both conventional and FHA loans are great loan programs. Deciding between the two really depends on your personal situation. If you have a higher down payment, good credit and relatively low debt (compared to your income), you will want to take advantage of the lower costs associated with conventional loans. On the other hand, if prefer to put less money down, would like to use gifted funds, or need more lenient qualification criteria, FHA loans may be the perfect solution.
Contact a lender to find out if you qualify for one or both loan options. If you do qualify for both, compare them side-by-side from both a closing cost and monthly payment perspective. In addition to finding a reputable lender, it is also important to work with an experienced real estate agent to guide you through the home buying process. If you do not yet have an agent, give us a call!