As you consider applying for a loan mortgage, you will likely face various options, each with its unique benefits. Two typical loans are FHA loans and conventional loans.
FHA-insured loans, commonly called FHA loans, are granted by private lenders who adhere to the Federal Housing Administration standards.
On the other hand, conventional loans, also called conforming loans and charged by federal regulations, are given by private lending companies that follow the Federal Housing Finance Agency (FHFA) guidelines.
Let’s explore each one below.
Conventional Loan Mortgages
Conventional loans are used to finance the purchase of either your primary residence, secondary residence, or rental property. Some of its qualities include:
- Depending on the lender’s requirements, a down payment of at least three percent and up to 20% if you’re looking to waive PMI.
- Fixed interest rate or adjustable-rate (ARMs) terms.
- Various term lengths, ranging from 10–30 years.
To qualify for conventional loan mortgages, potential borrowers must meet specific criteria that are in place to protect the lenders. These criteria include:
- Credit score: Conventional mortgages require at least a 620 credit score but with the recent economy Fannie Mae/Freddie Mac are requiring many buyers to have at least 680 credit for Conventional financing. The higher your credit score, the better your loan terms will be.
Other loan options may be available for those below that minimum threshold, but they may not have as favorable terms to account for the increased risk. If you intend on applying for a conventional loan, check your score beforehand so you know what you can expect.
- Debt-to-income (DTI) ratio: The DTI ratio is the percentage of your debt obligations compared to your income. A high down payment, an excellent credit score, substantial cash reserves, very high income, or stability at a job for two or more years can influence you receiving your best financing.
- Down payment: This amount can vary when purchasing a home, but it’s almost always more than 3 percent of the total price. The Conventional 97, for example, has a down payment that ranges from 3–20 percent because some lenders require larger down payments for bigger loans.
Conventional Loan Mortgages vs. FHA Ones
FHA loan mortgages are loans insured under Federal Housing Administration (FHA), leading to different qualifying criteria and offering various benefits and drawbacks than a conventional loan mortgage. FHA home loans put homeownership within the grasp of many people; they’re less stringent than other programs. Depending on your circumstances, you might choose one over the other.
Here’s a quick comparison between the two:
- Conventional Loan Mortgages:
- We even have special Conventional financing options that allow you to waive PMI with as little as 10% down.
- To avoid Private Mortgage Insurance (PMI), a homeowner’s loan-to-value ratio must be 80 percent or less. Higher loan-to-value ratios will incur a higher premium, whereas a lower loan-to-value ratio will incur a lower premium. With high qualifications, the PMI on a Conventional loan would be lower than PMI on a FHA loan. With lower qualifications, the PMI on Conventional would be higher than that of FHA.
- FHA Loan Mortgages:
- PMI is needed throughout the loan mortgage to protect lenders from default.
- The PMI of 1.75 percent of your base loan amount is due only if you borrow that amount as a cash-out refinance. You can lower it by paying a 1 percent upfront mortgage insurance premium with an 80 percent loan-to-value ratio.
- Note that PMI on FHA loans is the same percentage for all buyers, regardless of their qualifications. Homeowners can only rid themselves of the PMI by refinancing to a traditional loan or after 11 years if they put more than 10 percent down when buying their home.
Final Note
The type of loan mortgage you should get depends on your circumstances. A conventional home loan is for you if you can afford a hefty down payment while managing your DTI and other financial obligations. However, if you don’t mind being strapped to a longer-term loan that offers more affordable prices at the start, then go for an FHA loan mortgage. This article simply compares both to choose which is suitable for you.
Contact McGowan Mortgages at (816) 631-9687 for the right loan mortgage! We ensure your home purchase or refinancing is top-tier, as we have helped thousands of homeowners in Missouri make their house dreams come true. We’ll do the same for you, so apply with us today.
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