Understanding FHA vs Conventional Loans

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When it comes to purchasing a home, no matter if it’s here in San Francisco or somewhere else, you might want to learn the differences between FHA vs conventional loans so that you can get the best loan for you. Loan professionals state that it is not as easy to get a mortgage loan as it used to be with the unfortunate housing crisis that occurred several years ago.  This is why it is best to understand the ins and outs of the various types of loans available.

FHA Loans

If your credit score is under 600 and you are short on the 10% down payment that is usually standard, look into acquiring an FHA loan.  These loans, normally guaranteed by the Federal Housing Administration, are usually easier to get approved for and you may only need 3.5% down. The reason they may be easier to obtain is because lenders feel safer issuing them since they are backed by the federal government. Keep in mind though, that you may be required to purchase mortgage insurance, which adds monthly expenses to your budget. If you do have to purchase mortgage insurance, be prepared to pay 1.5% of the loan amount at closing and a 0.5% annual fee. The only way to skip the monthly fees are if you have at least a 20% down payment, in which most people do not have.

FHA loans are more popular for first-time home buyers who simply do not have a high credit score or a lot of money saved for a down payment for a home.

Conventional Loans

Your credit must be quite good to secure a conventional loan. Fannie Mae and Freddie Mac are used a great deal for such loans and since the government bailed both of them out since the housing crisis, the underwriting guidelines have been tightened, making it much harder to obtain such a loan. Conventional loans require a down payment of between 5 to 20 percent down and that number will vary depending on the credit score.

If your credit score is below 740, you might get charged extra fees.  The loan guidelines state that you should have at least a 620 credit score to qualify for a conventional loan.  They will also check to see that you have a consistent job history, income documentation, and check your debt-to-income ratio, as the ceiling for such is about 45%. You can choose between a fixed or adjustable interest rate that will depend on the length of the loan. Typical loan lengths are 15 or 30 years.

The Pros and Cons of FHA vs Conventional Loans

Both FHA and conventional loans have pros and cons.  FHA loans come in handy for those who have struggled with their credit scores due to one reason or another.  They are also perfect for those who do not have enough money for a large down payment. The mortgage insurance may be an extra cost, but many home owners are willing to foot the bill just to have the chance to own their own home.

Conventional homes are the best option financially, but not everyone is able to afford the 10-20% down payment or have a high credit score.  So when you are thinking about purchasing a home, take a look at your credit score and determine how much money you have toward a down payment.  Figure out what it is you will need to obtain a loan and take steps toward your goals.  When it comes to FHA vs conventional loans, they are both good options in the right situation.

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