Conventional and FHA loans have some significant differences that must be understood in order to make the right decision when it is time to buy a home. There are some benefits to each, but it’s important to understand how those differences can impact your situation.
Conventional loans are not insured by the federal government, and most of them use the Fannie Mae and Freddie Mac guidelines for conforming loans. These are most often used by borrowers who have excellent credit and can make a substantial down payment up front, and it can be used to buy a home or refinance a mortgage.
There are two types of conventional loans: fixed rate and adjustable rate mortgages. A fixed rate means a predicable payment each month, while an adjustable rate offers a lower initial payment but carries a risk of much higher interest rates throughout the life of the mortgage.
There are established guidelines for acquiring these loans, and they cover the borrower’s credit scores, income requirements, and the minimum down payment. These guidelines can change over time, though, so it is important to watch them. These loans can be a little easier to get than FHA or VA mortgages, but you will need excellent credit to qualify for them.
FHA loans have become one of the fastest growing loan programs, and the Federal Housing Administration has backed tens of millions of mortgages since it was first established. The FHA does not actually lend money, but it provides the government backing for when a borrower is forced to default on the loan.
Borrowers can sometimes get an FHA loan even if they have a moderate to high debt-to-income ratio and they can even qualify for higher mortgage payments. This flexibility is the result of lender’s being more willing to look at a borrower’s credit history and spending habits to determine whether or not this would be a safe investment.
FHA loans require a smaller down payment than conventional loans, and there is no absolute requirement for a minimum credit score. On the other hand, there are some insurance premiums and other annual costs that add to the loan throughout the term. Still, this flexibility has made them a popular option for homebuyers.