Which loan is right for you?

Searching for financial assistance for your new home? There are a handful of mortgage loan options available on the market to help you and your family afford your dream home. Two of the most common home loan options, FHA and conventional, could be the right move for your purchase. Continue reading to learn more about these different types of loans and which one is the right option for you.

What is a Conventional Loan?

A conventional loan is a mortgage that is not guaranteed or insured by any government agency such as FHA, VA, or USDA. Conventional loans are either conforming or non-conforming. Conforming mortgages are required to conform to underwriting guidelines and loan limits set by Fannie Mae or Freddie Mac, whereas Non-conforming mortgages have loan amounts higher than the loan limits set by Fannie Mae / Freddie Mac. Many homeowners prefer conventional loans because of their low down payments of just 3%. However, for homeowners who are able to put down a 20% down payment on their conventional loan, they can receive the benefit of not having to pay a monthly mortgage insurance payment. While FHA loans require a mortgage insurance payment at closing, conventional loans do not. The agencies Freddie Mac and Fannie
Mae - understand that all homebuyers have different financial situations, so this type of home loan allows homebuyers to choose the repayment plan they prefer, from paying within 10 years up until 30 years.

However, there can be some downsides to applying for a conventional loan instead of an FHA loan. For homebuyers with a less-than-stellar credit score, it might be difficult to get approved for a conventional loan. This type of loan generally requires a credit score of at least 620. Conventional loans also require homebuyers to have a DTI (debt-to-income ratio) lower than 50%. While these requirements could deter some, for homebuyers with an excellent credit score and a low debt-to-income ratio, applying for a conventional loan could be the right decision.


What is an FHA Loan?

FHA loans are insured by the Federal Housing Administration (FHA). These loans are a great option for homebuyers whose credit scores don’t make the cut for a conventional loan. The FHA allows homebuyers to be approved for a loan with a credit score of just 500. For FHA loans, homebuyers still need to prove a low DTI, but it allows more leniency for buyers with lower credit scores.

A slightly higher down payment is required for an FHA loan. Homebuyers will need to pay a minimum down payment of 3.5% if their FICO score is 580 or above, or 10% if their FICO score is lower than 580. If they choose to pay the minimum down payment, monthly insurance payments will be required for the length of the loan. However, if the homebuyer is able to put a 10% down payment down at time of closing, they will only need to pay insurance payments for the first 11 years. An FHA loan will not offer the same amount of flexibility as a conventional loan, but for homebuyers who are willing to pay mortgage payments for 15 years up to 30 years, an FHA loan could be a suitable financial option.

Which one is right for you?

Whether you’re financially able to put down a large down payment on a mortgage or are looking to pay the minimum, an FHA or conventional loan can help you afford your new home. For those looking for more flexibility, a conventional loan is a good option. However, this type of loan requires the borrower to be in better financial standing than an FHA loan does.

We’re happy to answer any questions you may have about to mortgage loan application process. For more information on FHA loans or conventional loans, click here to give our team at Sun West a call.