WHAT ARE THE PROS AND CONS OF FHA AND CONVENTIONAL LOANS? WHICH ONE TO CHOOSE?
In your search for a mortgage loan, you will come across two options. The first is called a FHA loan and the second is called a conventional mortgage loan. FHA stands for Federal Housing Administration and offers mortgage insurance on the loans that are made by FHA approved mortgage lenders. The FHA doesn’t lend the money, but rather, insures the loan in order to minimize the lender’s financial risk.
Pros and Cons of FHA Loan
- A major advantage of an FHA loan is that you don’t have to make a large down payment. Instead, the down payment can be as low as 3%, which is not much when compared to the initial payment of 20% required with conventional loans. The minimum payment makes this loan ideal for those who have not been able to save enough money for the purchase.
- The property will have to be appraised by an FHA approved appraiser, and it must also meet the required conditions. The biggest disadvantage here is the MIP, or Mortgage Insurance Premium. There are two types of MIPs, the UFMIP and annual MIP. The MIPS has to be paid upfront while the annual MIP is of course paid annually. Borrowers need to pay both of these MIPs in an FHA loan.
- Another disadvantage of the FHA loan is that since the down payment is very low, borrowers usually have to pay more interest than in a conventional loan.
Pros and Cons of a Conventional LoanOn the flipside, a conventional loan can be acquired by a financial institution without requiring government backing. But, these too come with their pros and cons.
- Getting a conventional loan usually requires less paperwork, which is always a good thing.
- Only the mortgage lender has to approve the loan, so there are no delays because of reviews by other agencies.
- In most cases, mortgage insurance is not required.
- This type of loan usually requires a higher down payment.
- The closing costs need to be paid at settlement and cannot be rolled into the mortgage as with a FHA loan.
- Application and processing fees are also required in the conventional loan.
Bottom LineWhile both these types of mortgage plans come with their pros and cons, the best way to go about getting a home loan is by contact a mortgage loan specialist for the best rates possible.
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