There are many different factors to consider when choosing the best loan program option. That is where the skills and knowledge of your loan officer will play a significant role in your decision. One of those choices is the option between FHA Home loans vs Conventional loans. Here are some pros and cons of these two products.
FHA Loans:
Pros:
- They only require 3.5% down payment, which is less compared to a traditional conventional loan with 5% down.
- FHA loans tolerate lower credit scores and yet offer very competitive rates.
- They allow non-occupant co-borrowers and gift money both.
- FHA loans tend to have more flexible underwriting guidelines.
- Mortgage Insurance is the same, regardless of score or debt to income as long as borrowers are approved for the loan.
Cons:
- The monthly MI is for life of the loan (when putting down less than 10%)
- There is an upfront funding fee of 1.75% that is added to the total loan amount.
- There is no option to buy the mortgage insurance up-front or eliminate it by putting down 20%.
- No investment properties or second home purchases are allowed.
Conventional Loans:
Pros:
- There are no up-front funding fees. What you put down will go toward the equity with no added fees for the loan.
- Borrowers can buy the mortgage insurance outright or do LPMI (Lender Paid Mortgage Insurance) which means lenders uses the rate to pay for it themselves instead.
- Mortgage Insurance will automatically drop-off once 78% loan to value is reached, regardless of the initial down payment.
- Conventional loans offer a first time home buyer program that requires only 3% down, and if you qualify for the My Community or Home Possible programs, then the mortgage insurance rate is also going to be lower.
- Conventional loans allow for second home (10% down) and investment property (20% down) purchases.
Cons:
- Conventional loans are more particular about credit scores, debt-to-income ratios, and down-payment amounts. These parameters drive rates and terms.
- Conventional loans tend to have more strict underwriting guidelines.
- Conventional loans allow gift money OR non-owner occupant co-borrowers, but not both at the same time.
To qualify for a Conventional Loan, you typically need a credit score of 620 or higher, a stable income, and a down payment of at least 3%. You will also need to provide proof of employment and income, as well as documentation of your assets and debts.
The interest rate for a Conventional Loan can vary depending on several factors, such as your credit score, loan amount, down payment, and the current market conditions. Generally, Conventional Loans offer competitive rates compared to other types of loans, but the specific rate you are offered will depend on your financial situation and the lender you choose to work with.
It’s our job to structure the best home loan option for you, and we’ll do our due diligence to make sure our borrowers get the best product based on their financial goals and plans.
