FHA Loan vs. Conventional Loan: Which one is right for you?

FHA Loan vs. Conventional Loan: Which one is right for you?
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Definitions

  • FHA loan is a mortgage which is guaranteed by the Federal Housing Administration (FHA).
  • A conventional loan refers to a traditional home loan without any government backing.

For an FHA loan, the FHA agrees to pay for a large portion of the balance of a loan if a borrower defaults on the loan, this is what’s meant by the FHA insuring the loan. This insurance means the lenders can provide FHA loans without as much concern about incurring significant losses. This lowered risk allows lenders to offer more favorable terms than they can for conventional loans.

Down Payment Differences

The most significant of the differences in terms is the difference in the down payments. FHA loans tend to have much smaller down payments than conventional loans; FHA loans have down payments of 3.5% or 10% depending on your credit rating, whereas conventional loans can have down payments as much as 20%. Also, with FHA loans down payments are made as gifts by a friend or family member. The smaller down payments make FHA loans ideal for first-time homeowners since they do not have the sale of a previous home to pay the down payment on a new loan.

Rates, Credit Score, and More

The interest rates are generally lower for FHA loans. However, this is country-balanced somewhat by annual fees on mandatory insurance, which are between .45% and .85%. While FHA loans usually have lower credit requirements than conventional loans, they also have some more restrictions. FHA loans can only be used on the borrower’s primary residence, whereas conventional loans can be used on other properties such as a summer home, or a house you plan to rent for profit. Also important to note is that FHA loans have maximum limits (set based on the county the home is found in), so if you’re planning on buying a high-cost home, FHA loans may not cover you. 

If you’re not sure about which loan will suit you best, you can always check out the FHA website to see more about their conditions. Talking to a loan expert or financial advisor to compare some conventional lenders is also a good way to get a better idea for your best borrowing option. 

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