Buying a house comes with a lot of questions. One of the biggest decisions is choosing the best home loan type for your situation.
It often comes down to deciding between a conventional loan vs. FHA loan.
And it doesn’t matter if you’re a buyer or a seller…
You both face the same choice.
Buyers must choose how to finance their home purchase, and sellers often must decide between an FHA vs. conventional loan when reviewing offers on the house.
Is one better than the other?
Like most things, the answer is “it depends.”
Whether you’re a buyer or seller, let’s dive into the differences to find out which is right for you.
WHAT IS AN FHA LOAN?
The Federal Housing Administration (FHA) backs the FHA loan program. It lowers some of the down payment and credit restrictions to make buying a house easier for low- to middle-income earners.
But there is no income cap.
That means an FHA loan can be an excellent choice for high-income earners, too. The downside is it comes with limits on how much you can borrow.
If you earn a high income and want a more expensive home, FHA might not be the right program for you.
A common misconception is that FHA loans are only for first-time homebuyers.
As long as you’ll use the house as your primary residence, it’s a great choice to finance your first or fifth house.
WHAT IS A CONVENTIONAL LOAN?
The government doesn’t insure or guarantee conventional loans. Instead, it’s insured by private lenders.
And that means you need a higher credit score and lower debt-to-income ratio to qualify.
You might also need a higher down payment.
But there’s a significant advantage...
The appraisal requirements are much more flexible than government-backed mortgage programs, which can benefit buyers and sellers.
CONVENTIONAL LOAN VS FHA LOAN FOR SELLERS
FHA loans are an excellent option for buyers. But what if you’re on the other end of the deal?
If you’re a seller, accepting an offer from a potential buyer relying on an FHA loan can seem risky.
You might see it as a sign that the buyer isn’t financially stable because of the lower credit score and down payment requirements.
But that isn’t always the case.
And with consumer debt on the rise, the higher debt-to-income ratio allowed with an FHA loan could improve the chances of the deal going through.
What if the property has safety issues or things that need fixing?
In that case, a conventional loan makes more sense.
Conventional loan appraisals aren’t as strict as FHA appraisals, and an FHA appraiser may require you to make repairs.
CONVENTIONAL LOAN VS FHA LOAN FOR BUYERS
If you’re looking to buy a house, an FHA loan can be an attractive option. It offers two key advantages over a conventional loan:
- Low credit score requirement
- Low down payment option
Some conventional loans allow a 3% minimum down payment, which is lower than FHA’s 3.5% requirement, but that’s generally reserved for borrowers with credit scores in the 700s or better.
Another substantial difference is when you pay mortgage insurance on your loan.
Conventional loans only make you pay private mortgage insurance if you put less than 20% down for a down payment.
But FHA loans?
They add a mortgage insurance premium that’s typically paid over the life of the loan regardless of how much you put down.
The good news is the Federal Housing Administration lowered the mortgage insurance premiums in 2015, so borrowers pay less to buy a house with an FHA loan.
FHA LOAN VS VA LOAN
Both FHA loans and VA loans are fantastic home-buying programs for borrowers.
The U.S. Department of Veterans Affairs backs VA mortgages.
That means you must be a service member, veteran, or a spouse of a service member or veteran to qualify.
If you’re eligible for a VA loan, it’s often a better option over an FHA loan because you could get into a house with a zero down payment.
Plus, VA loans don’t charge private mortgage insurance, keeping more money in your pocket.
HOW TO DECIDE BETWEEN A CONVENTIONAL LOAN VS FHA LOAN
Picking a loan program isn’t a walk in the park.
If you have 20% saved for a down payment and a great credit score, a conventional loan can be a smart option. And VA loans are popular for service members, veterans, and their families.
But if your credit score is a little low or you want to buy a home with a smaller down payment, FHA loans can be what you’re looking for.
And if you’re not sure?
That’s okay, too.
Because the Wendy Thompson Lending Team is here to help.
We’ll help you pick the best home loan program for your credit score and financial goals and walk you through the lending process.
If you’re ready to find your dream home, call the Wendy Thompson Lending Team today!
Deciding on the right FHA lender is the most important decision you will make. Choosing the wrong lender can result in you losing your dream home or costing you hundreds of thousands of dollars in more interest over the life of your mortgage.
Don’t make that mistake, contact the Wendy Thompson Lending Team today!
You can start the process by clicking the yellow 'See if I'm Eligible' button on the right side bar under the 'Start your quote for a Home Loan' or call Wendy’s Team directly at (901) 250-2294, to get started on living the American Dream in the home of your Dreams!