When you’re looking to buy a home, there are many options to choose from when it comes to financing. From adjustable to fixed, to various loan types, there are a number of considerations for a home buyer to weigh. If you’re a first-time homebuyer, your loan options include a conventional loan or an FHA loan. Here you’ll learn the differences between them to help you determine which could be right for your situation.
A conventional loan is not backed by the federal government, so there are no guarantees to the lender should a borrower default. This is why lenders prefer homeowners make a downpayment of 20% of the sale price of the property for a conventional loan. When the borrower does not make the 20% downpayment, they are required to pay private mortgage insurance (PMI) in addition to the monthly mortgage payment for a certain period. However, you could put as little as 3% down on a conventional loan.
As compared to FHA loans, conventional loans have stricter credit requirements. There is a loan limit based on your location, but if you need a higher mortgage amount, you can apply for a jumbo loan. Currently the maximum limit in higher-cost areas is $625,500. Conventional loans can also be used to purchase a second home, retirement or investment property.
Federal Housing Administration (FHA) Loans
FHA loans is a government program for first time home buyers and is insured by the Federal Housing Administration, an agency of the U.S. government. As compared to conventional loans, FHA-insured loans generally have smaller downpayment requirements and in some cases may have more flexible underwriting requirements. However, there is a maximum loan limit depending on your location. See the FHA loan limits for 2019.
With FHA loans, you have to pay an upfront MIP (mortgage insurance premium) as well as a monthly MIP fee that will be calculated as part of your monthly mortgage payment. MIP must be paid for over the life of the loan if you put less than 10% down. Learn more about FHA loan requirements.
Which should you choose?
If you don’t have much money in the bank and your credit scores are not as strong, an FHA loan may be a good option for you to become a homeowner. However, conventional loans can be more flexible, but you need to ensure your credit score and down payment meet the minimum requirements determined by each lender.