A question that comes up for anyone getting a mortgage is if they should get a conventional or FHA loan since these are two programs that are commonly used by home buyers. Here is what you need to know about the differences between these two loans so that you can make a more informed decision.
When you think of an FHA loan, you need to think about the government because FHA loans are backed by the government. It's important to know because this is the entity that is either approving you for a mortgage or not. The good news is that an FHA loan has a low barrier of entry, which makes it possible for more people to become homeowners. This includes the credit score and down payment requirements.
That low barrier of entry does mean that an FHA loan can be more expensive. With an FHA loan, you'll have to pay a mortgage insurance premium (MIP) for the entire length of the loan. The only way to get rid of MIP is to refinance the home and get a new mortgage.
One thing to keep in mind about an FHA loan is that there is a lower loan limit, which is how much money the lender will potentially give you for a home. While more expensive parts of the country have a higher loan limit, the limit itself can certainly restrict what kind of home you buy.
A conventional mortgage is provided by private lenders, which could include a bank, credit union, or a private lender. The big difference in credit score requirements with conventional mortgages is that your credit score can have a big impact on your interest rate. In general, a person with a higher credit score is considered less of a risk, and you'll see lower interest rates as a result.
Conventional mortgages also have a private mortgage insurance (PMI) requirement for those borrowers that have less than a 20% down payment. However, the big difference is that PMI goes away after you paid your mortgage long enough to have 20% equity in the property. You can also make improvements to your home that increase its value, which results in you owning more than 20% of your home when the property is reassessed.
You can also purchase a more expensive loan with a conventional mortgage since they have a higher loan limit. If you exceed that limit, then you will need to apply for a jumbo loan that has slightly different rules regarding them.
For more information, contact a real estate loan lending business.