When purchasing a new home, it is important to consider multiple types of mortgage loans. The mortgage application process considers many aspect of your financial situation such as credit score, income, loan preferences, and debt-to-income ratio. Two popular loan options are FHA loans or conventional loans. Both loans assist borrowers in becoming homeowners.
FHA Loan Overview
FHA loans are mortgage loans insured by the Federal Housing Administration (FHA). They are highly popular among first time home buyers due to 3.5% down payments for credit scores 580 and above. If you have poor credit history, FHA loans may be a perfect fit. FHA mortgages plans also forgive bankruptcy and foreclosures. You may be eligible for FHA loans 2-4 years after bankruptcy or 3-7 years after foreclosure. FHA loans are not restricted to geographic areas, however loan limits are based on the median income in a given area. Furthermore, FHA loan programs only offer insured loans, and do not act as a guarantor. FHA loans also have flexibility with source of down payment funds and allow another party to gift 100% of the down payment.
With lower down payment options and lower credit score limits, FHA borrowers are also eligible for a special refinance program called ‘streamline refinances.’ This refinance program is for homeowners currently in an FHA loan and may provide a lower rate on your FHA mortgage with out a complicated process. Other benefits to the FHA Streamline refinance include 5-year adjustable rate (ARM) and no required appraisal. Furthermore, the FHA Streamline refinance program offers 15, 20, 25, or 30 year fixed-rate loans.
The FHA Assumable Mortgage Program is another benefit of the Federal Housing Administration. Assumable loans allows qualified new home owners to take over the mortgage of the former home owner. This program is popular when parents gift children the home, children inherit the home, or spouses split assets. The new mortgage owner must be creditworthy as determined by an exploration of income, debt, and credit of the new borrowers.
Learn more about FHA loan requirements.
FHA Loan Profile:
- Minimum credit score of 580
- Low/Minimum down payment: 3.5 percent
- Lower interest rates
- Offers assumable loans and provides streamline refinance
- No flexibility with loan insurance premiums. Have to pay in every case.
- Flexible with credit problems (foreclosure, bankruptcy)
- Downpayment and closing costs can be given as a gift
Conventional Loan Overview
A conventional loan is a mortgage plan that is not insured by a government agency. This loan is used to purchase primary homes as well as second homes and investment properties. These loans generally follow Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac guidelines.
There are two types of Conventional Loans: conforming and non-conforming. Conforming loans comply with Fannie Mae and Freddie Mac. These conforming loans are for loan amounts less than $417,000. Non-conforming loans amounts are above Fannie Mae and Freddie Mac lending guideline and are geared towards those who do not qualify for conforming loans.
Private Mortgage Insurance (PMI) is a key factor in Conventional loans. For a conventional loan, the PMI is risk-based. This means premiums are lower for those with higher down payments and higher credit scores.
Conventional loans do not require any upfront mortgage insurance payments. However, for borrowers with down payment less than 20%, ongoing mortgage insurance is required.
Conventional Loan Profile:
- Minimum credit score of 620
- Low/Minimum down payment: 5%
- Lenient loan insurance: Yes, if the LTV exceeds 80% and insurance will end at 78% LTV mortgage insurance is less expensive (0.51% vs 0.85 with FHA). No upfront PMI required.
- Not flexible with past credit issues.
- Offers higher loan amounts, and lower monthly payments depending on the interest rates.
When purchasing a home, consider FHA Loans or Conventional loans for your mortgage needs. Find more information about refinancing an FHA loan into a conventional loan.