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FHA Loans vs. Conventional Loans: Which Is Right for You?

January 4, 2021

FHA Loans vs. Conventional Loans: Which Is Right for You?

Are you looking to buy a mortgage but don’t know which type of loan to choose? Two of the most popular mortgage loans people consider are FHA loans and conventional loans. Our team sat down together to discuss the difference between each loan and the benefits of each to make it easier for you to select the right loan for you. 

What are FHA Loans?

Federal Housing Administration (FHA) loans are government-backed home loans insured by the Federal Housing Administration. Generally, FHA loans have a lower down payment amount with assistance available for those who qualify. This type of loan is often a good fit for first-time homebuyers because of their less restrictive qualifications. But, it can also be an optimal choice if you find that your debt-to-income ratio is higher or don’t have a lot of cash in the bank for reserves. 

Additionally, FHA loans have short time restrictions for people recovering from major credit issues such as bankruptcy or foreclosure. The holding period for an FHA loan is 3 years instead of 7 for foreclosure and 2 years instead of 4 for bankruptcy. 

What is a Conventional Loan?

Conventional loans are also called conforming loans as they conform to Fannie Mae and Freddie Mac Standards. Fannie Mae and Freddie Mac are government-created enterprises that buy mortgages from lenders to hold or turn them into mortgage-backed securities. Conventional loans are available at fixed rates or as Adjustable Rate Mortgages (ARMs). Common loan terms range from 10-30 years. Conventional loans aren’t insured or guaranteed by a government agency but instead insured by private lenders. For borrowers with good credit, balanced income and debt, and some down payment, conventional loans are often the least complicated and most flexible mortgage loan option. 

Advantages of an FHA Loan

FHA loans typically have a low down payment, allowing you to put down as little as 3.5%. FHA loans are great for buyers with higher debt-to-income ratios. Further, FHA loans require a lower minimum credit score making them a viable option if you’ve had credit problems in the past. After financial hardships, such as foreclosures and bankruptcy, FHA loans offer shorter waiting periods to qualify for new credit. FHA loans can be used for a primary residence or second home. 

Advantages of a Conventional Loan 

Conventional mortgage loans generally require less documentation than FHA loans. If you submit a down payment of 20% or more, you won’t be required to have mortgage insurance, although you can do as little as 3 – 5% down payment. Conventional loan terms can span 10, 15, 20, or 30 years and can amount up to $548,250. Additionally, unlike FHA loans, conventional loans can be used to purchase second homes or investment property. 

Things to Consider About FHA Loans

Some important things to keep in mind with FHA loans is that while the interest rate may be lower, they require borrowers to pay mortgage insurance premiums upfront. This upfront cost will be 1.75% of your loan amount. Further, FHA loans can be used only for a primary residence, not a second home or investment property, and they have maximum loan amounts that vary by state and county. 

Things to Consider About Conventional Loans

For a conventional loan, you will need to make a down payment of at least 3%. If you put down less than 20%, you may be required to carry mortgage insurance. When taking out a conventional loan, you are more likely to get a favorable rate if you have an excellent credit record and a high FICO score. Since conventional loans are not insured, a lender may require you to prove that you have an adequate income to support the loan and an acceptable debt-to-income ratio. 

Select the Right Loan with The Mortgage Firm North Central Florida

When deciding between an FHA loan and a conventional loan, the most important factor is understanding which loan is right for your financial situation and needs. At the Mortgage Firm North Central Florida, we are committed to helping you find the right mortgage loan to fit your every need. Contact our loan specialists today to learn more about the pros and cons of each loan.