Right now, mortgage rates are lower than they’ve been in years, which means that if you’ve been considering buying a home, now might be the time to start shopping around. But before you jump headfirst into the market, the first thing you need to consider is what type of loan you want to go for.
Because of the Federal Housing Administration’s recent reduction of annual premiums for new borrowers, the FHA’s 3.5% down payment loan has become a popular choice among new borrowers. But is it the right choice for you? This week we’re comparing FHA and conventional loans to give you a clearer look at some of the key differences between two of the most popular current home loan options.
Up until recently, the FHA’s 3.5% down payment option was the hands-down winner in the low-down payment department. However, a new 2015 loan program from Fannie Mae and Freddie Mac requires Just 3% down, making it a highly attractive option for those who would otherwise qualify for a loan but lack the capital up front to make the usual down payment of 5% or more.
Credit Score Requirements:
Part of a federal program designed to encourage home ownership nationwide, FHA loans are generally preferred by first-time home owners. And because FHA loans are guaranteed by the United States government and administered by FHA-approved lenders, they tend to be more lenient with their credit score requirements, making them attractive to borrowers with less-than-perfect credit. However, if your credit is particularly bad (500-580), you should expect a minimum down payment of 10% with an FHA loan. Still, because a conventional loan requires a minimum credit score of 620, if your credit is poor and you are absolutely determined to buy a home, the FHA might be your only real option.
While both types of loans require you to pay a mortgage insurance premium (MIP), only the conventional loan gives you a way out. With an FHA loan, you are locked into monthly PMI payments for the entire life of your loan. On the other hand, with a conventional loan you have the option to cancel your MIP payment once your home reaches 20% equity, and you can avoid MIP payments altogether if you begin your loan with a down payment of 20% or more.
As we’re all aware, federal bureaucracy can be painfully slow, which means that FHA loans can have much longer processing times, whereas conventional loans tend to process pretty quickly, allowing home equity to start building right away. Furthermore, while conventional loans come with little to no additional closing costs, FHA loans include a 1% percent origination fee, as well as a 1.75% upfront mortgage insurance premium, adding to both your initial costs as well as your monthly payment.
Since FHA loans are subject to a lot more government restrictions, conventional loans might offer more room for flexibility and negotiation. However, if your credit score isn’t quite as high as you’d like, or you’re a first-time buyer, the security and lenience of an FHA loan might be the option for you. No matter what you choose, make sure you do your research. Talk to a mortgage officer and find out exactly how much you’ll be able to pay before you sign any paperwork.