FHA Loans Vs. Traditional Mortgage

When it comes time to buy a new house, facing a mortgage payment can be daunting; with the right mortgage assistance, however, you don’t have to go it alone. With several different kinds of loans available in the United States, the savvy home buyer can plan their financial future with confidence, knowing that they’ve selected the right loan for their circumstances—but how do you know which loan is right for you?

In this article, we break down the pros and cons of conventional loans and take a look at how they compare to FHA Loans.

There are several key benefits of a conventional mortgage that merit exploring. Here are the pros and cons of a traditional mortgage loan:

Pros

·      Easier to pass inspections: Because conventional mortgages do not have the rigorous property inspections associated with FHA Loans, it is generally easier to get the desired property approved for a loan.

·      Smaller down payments: Most of the time, a conventional mortgage will allow you to put 3% down on a house. This is compared to FHA Loans, which tend to require 3.5%. As a general rule, the better your credit, the smaller the down payment—so pay attention to your credit health!

·      Flipping is allowed: Unlike FHA Loans, you can do whatever you want with the property after you purchase it—so you can flip homes to your heart’s content!

Cons

·      High credit score requirements: Because conventional mortgage loans tend to require less of a down payment, they do require higher credit scores. Typically, conventional loans require a credit score of 620 or above to qualify.

·      Require insurance on down payments of less than 20%: In the case that a homebuyer puts less than 20% down on a house, they will need to find private mortgage insurance to cover their loan. With conventional mortgages, however, the insurance coverage may be cancelled after your equity climbs to 78% of the purchase—unlike FHA Loans, which require insurance to last the life of the loan.

While it might be easier to qualify for a conventional mortgage loan, there are some circumstances that may make an FHA Loan more beneficial to the prospective home buyer. Here are some of the pros and cons of FHA Loans:

Pros

·      Lower credit score requirements: If you have an unconventional credit history or a score below 620, you may still qualify for an FHA Loan. In fact, some FHA Loans extend to buyers with credit scores as low as 500, so long as they can put 10% down!

·      Allow higher debt-to-income ratios for borrowers:  This is good news for folks with a high debt-to-income (DTI) ratio! FHA Loans can be approved for folks with DTIs as high as 50%. In contrast, it’s rare that a conventional loan is approved for borrowers with DTIs above 43%.

·      Can be refinanced later down the road: While it may be easier for you to qualify for an FHA Loan than a conventional mortgage loan, it doesn’t always have to stay that way as you continue to pay your mortgage! In fact, many folks choose to refinance their house and switch to a conventional mortgage later, to reap the benefits of both mortgage plans.

Cons

·      Higher down payment requirements: Because FHA Loans do not have the strict credit score qualifications inherent in conventional mortgage loans, they do require a higher down payment to qualify. Typically, FHA Loans require down payments of 3.5% while conventional loans require around 3%.

·      Strict property requirements: The Federal Housing Administration does not want to make an investment in a property that is going to depreciate in value—so it requires strict inspections to be done of the value of the property. Even if you have a high credit score and plenty put away for a down payment, there is still a chance you won’t qualify for an FHA Loan if the property isn’t up to standard!

·      Must use the house as your primary residence: Unlike with conventional mortgage loans, the FHA does care what you do with your home once you’ve purchased it. In order to qualify for their assistance, you must use the house as your primary living quarters after purchasing.

·      Mandatory mortgage insurance: While conventional mortgage loans require insurance on purchases where less than 20% down payment is provided, FHA Loans require mortgage insurance regardless of circumstances. If the buyer wants to cancel the insurance, they must refinance their loan to a conventional mortgage

When making the choice between conventional mortgage options and FHA Loans, it’s not quite as simple as looking at savings alone. Credit score, the value of the property, and debt-to-income ratios all have a part to play in addition to the size of your down payment.

If you’re curious about whether or not you qualify for mortgage assistance, look for qualified loan consultants in your area! For more information on different types of mortgage loans, click here.