Applying for a mortgage involves plenty of considerations financially. You have to meet specific qualification standards set by lenders, and of course, gauge your capacity to pay. Luckily, mortgage now and days comes in different types and forms in the efforts to accommodate a greater scope of aspiring homeowners.
Mortgages fall under two categories. They are either conventional or government-insured. Conventional loans are financed by banks and mortgage companies while government-insured loans are, as the term implies, guaranteed by an agency or department of the federal government. For clarity, the government does not offer government-insured loans. They are still issued by financial institutions, only that they have government backing. The FHA loan belongs to this category.
Due to the government backing, FHA loans have more relaxed standards are relatively easier to qualify than conventional loans. However, this does not mean that conventional loans do not hold an advantage over its government-insured counterpart.
Advantages of FHA Loans
Requires Lower Credit Score
Good credit standing is a usual and necessary requisite for availing any type of loan. Those who have less-than-desirable credit should seriously consider the possibility of applying for an FHA loan. While most lenders ask for at least a 620 to qualify for a conventional mortgage, a credit score of 580 is good enough to get approved for an FHA loan. In some cases, lenders would even consider applicants with a credit score of 500, given that they pay a higher down payment.
Lower Down Payment Rate
Most conventional mortgages demand an upfront payment of 5% to 20% of the property’s purchase price. With the FHA loan, you only have to shell out 3.5% of the home’s total value. What more? Your down payment doesn’t have to be from your own pocket. FHA loans allow “gifts” from relatives or other people to settle the first payment
More Lenient Rules on Co-borrowers
Another feature of the FHA loan that makes it more convenient is the non-occupying co-borrower amendment, which permits you to enlist the help of a borrower who won’t be staying in the same house as you. This lets you gain more choices and take advantage of relatives who are willing to shoulder some of the charges and help you raise your creditworthiness.
Advantages of Conventional Loans
Lower Interest Rate
Conventional loans prove to be the wiser choice if your credit score is pretty good and you have sufficient money saved up to cover the higher down payment costs. With a good credit history, you can negotiate for a better interest rate with the lender and save thousands of dollars in loan payments.
Higher Loan Limit
Conventional loans come in two types: Conforming and non-conforming loan. While conforming loans abide by the amount limit set by Freddie Mac and Fannie Mae, non-conforming loans include Jumbo loans, which consent loans beyond the loan cap. If you are aiming for a more expensive property and if your credit score and income fall well within the required range, then a conventional loan should be the choice for you.
Great Savings on Insurance
This is the part where the conventional loan gains a lot of advantage over the FHA loan. Going for an FHA loan means having to pay for two insurance premiums. The first one is to be paid upon the release of the credit, while the other is charged monthly for the entire life of the loan. With a conventional loan, you don’t have to worry with insurance if you paid 20% of the home’s value up front. In cases where less than 20% is presented for down payment, you only have to pay for one mortgage insurance until you paid off at least 22% of your debt. After that, the insurance charges would cease.
The Bottom Line
So, conventional loans vs FHA loans, which one is the better? Well, it all depends on the circumstances. Plenty of factors come into play, the most important of which is your ability to pay. An FHA loan may seem impractical when you consider the cost of insurance, but it can also be the suitable option for those who find conventional loan too difficult to qualify. Inversely, the initial expenses of conventional loans appear high, but it can prove to be the more economical choice in the long run.