Mortgage Loans: Conventional vs FHA
If you’re in the market for a mortgage, chances are you will hear strong arguments from friends, family – and even financial experts – about the respective advantages of both conventional loans and FHA loans. With all the competing information, how do you know which loan vehicle is right for you? The truth is, both are fantastic options, but your decision should rest on the following three factors:
Down Payment Requirements
Gone are the days when buyers had to pony up a 20 percent down payment – most consumers simply can’t afford it today. However, conventional loans still require a minimum down payment of 5 percent, with the additional regulation that the money cannot be a gift from a family member. FHA loans, on the other hand, require a minimum 3.5 percent down payment, and the full amount may be gifted to the buyer if they so choose.
In today’s real estate market, the largest outright payment aside from the down payment is closing costs. More than 85 percent of buyer’s request a seller’s concession – that is, a request for the seller to pay some or all of the closing costs. With a conventional loan, the buyer may request no more than 3 percent of the purchase price, but a buyer financed through the FHA may request up to a 6 percent concession.
With both conventional and FHA loans, buyers putting down less than 20 percent will pay a premium for it. With conventional loan terms, Private Mortgage Insurance (PMI) will be required, and it is very difficult to be approved for PMI with a credit score under 600. FHA loans have less stringent requirements, however, to qualify for their monthly Mortgage Insurance Premium (MIP).
If you’re unsure which type of mortgage loan may best suit your needs, be sure to meet with several lenders to ask questions and weigh your options before making this important financial commitment.
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