FHA Loans vs. Conventional Loans: Which are Better?
Are you a first time home buyer? Thinking about it, just a little? First, we’re excited for you because it is quite an experience both buying and owning your very own home but at the same time it can get a little confusing. Especially so when it comes time to shop for a home loan. There are so many different terms, many of which you’ve never even heard of before, that a lot of it can just go over your head. Your loan officer will always be there to walk you through the process but if you haven’t gotten that far yet let’s take a moment to separate two mortgage programs- FHA loans and conventional mortgages.
FHA loans, mortgage programs underwritten to standards issued by the Federal Housing Administration, carry a government guarantee to the mortgage company which compensates the lender should a loan ever go into default. This guarantee is financed by two separate mortgage insurance premiums. An upfront mortgage insurance premium is a one-time charge that is rolled into your loan amount. A second premium is an annual one paid out in monthly installments throughout the life of the loan. FHA doesn’t process or approve your loan, a mortgage lender does that, but does provide the guarantee to the lender.
A conventional loan carries no such guarantee to the lender and is not government-backed. The individual lender assumes the risk when approving a mortgage loan. Should a loan ever go into default the lender will be forced to foreclose on the property. All that said, which is better?
FHA loans are popular with first time buyers due to the low down payment requirement of 3.5% of the sales price. Conventional loans can require a down payment of at least 5.0% and one conventional loan program asks for a 3.0% down payment as a minimum. Yet with conventional loans with less than a 20% down payment there is a monthly mortgage insurance premium payment, much like FHA loans have.
Both programs will have competitive mortgage rates and monthly payments but if you’re seeking a loan that requires as little down as possible, either choice can work for you. However, if you do have a down payment approaching 20% or more, a conventional loan might be the better choice due to lack of any upfront or annual mortgage insurance premium.
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