Tuesday, December 20, 2016 / by Jason Huerkamp
FHA and Conventional LoansWhen buying a home and requiring a mortgage, we often get asked about the option of getting an Federal Housing Administration (FHA) Loan and what the difference would be to you the buyer. Would there be any reason why a seller would choose another offer to purchase with a conventional loan in preference to an FHA loan offer from a buyer.
What is an FHA Loan?
An FHA loan is one that is applied for through a conventional home loan provider (one on the list of providers by the FHA and approved by them) and is insured by the FHA so that the lender is guaranteed their money should you default on your loan. There are two sets of criteria to be met in order to be able to use the the FHA option - The Lenders criteria and The Governments criteria. The buyer, depending on their credit score, will generally be able to put down a lower downpayment of 3.5%. It is important to know your credit score and how to remedy it before applying for a loan and securing the low downpayment option, although lower credit scores are acceptable as part of the FHA Loan process. The Lenders are often a little more lenient with an FHA loan as the Government Insurance gives the lender a certain amount of security.
The FHA loan also allows the Seller of the property to contribute towards your closing costs. This is a great opportunity for first time home buyers and others to own a home.
There are two insurance premiums that need to get paid as part of the FHA guarantee. There is an upfront fee and an annual fee. The fees are allowed to be incorporated into and financed in the loan amount.
The FHA also has an particular product that will make a certain amount of cash available to do repairs and maintenance to the property purchased.
Of course the home needs to appraise at todays value in order for this option to be available. Its a good idea to talk to an FHA approved lender to find out more about this product.
Conventional loans are becoming more competitive with the FHA loan. Some institutions and lenders are allowing a lower downpayment option with excellent credit scores and PMI - Private Mortgage Insurance. If you have a clean credit history you can very often get a lower rate on your home loan and the PMI can be at an excellent rate too, often competing favorably with the FHA criteria and plans.
The PMI is payable annually and divided into 12 equal monthly payments. This insurance would be payable each year until your home has grown sufficiently in value to have 20% equity in the property. This is the security blanket the lender requires in order to allow cancellation of this insurance. It would be a good idea to keep a regular check on the home values in your subdivision / location so that you are able to cancel the policy as soon as your home reaches the value. PMI is required for a minimum period of 2 years. The lender will arrange an appraisal to confirm such fact.
When applying for a conventional loan, the lender will consider the following criteria
- Your Credit History
- Credit Score
Are you looking for a home? We would love to help you find the right home to suit your budget and your needs. If you need a loan, Conventional or FHA, let us assist you in contacting various lenders to meet your particular needs.