When looking for a home loan, there are a few options for buyers buying a home for the first time. However, one of the most popular ones especially among first time home buyers is the FHA loan which a mortgage insured by the Federal Housing Administration. Between conventional and FHA loans, let us a look at the advantages and disadvantages of an FHA loan against a conventional loan:
- Down Payment: The most significant advantage an FHA offers over a conventional loan is the amount of down payment you have to put in for a house loan. For conventional loans the minimum down payment is 5% of the purchase price, on the other hand, an FHA loan requires you to pay a down payment of only 3.5%. Not only that, the whole of the down payment for an FHA loan can come as a gift from a relative or suitable donor. However, no such facility is provided in a conventional loan, which often has high rates of interest with little to offer in return when buying a home for the first time.
- Required Credit: Another advantage an FHA provides over a conventional loan is the amount of credit needed for a home loan. In a Conventional loan, you will require a minimum of 620 credit score to receive a home loan. However, for an FHA loan, the required amount is 580. Also, even if you have filed for bankruptcy, you can still apply for an FHA loan.
- Interest Rates: The FHA loans will provide lower interest rates compared to conventional loans. For example, a ten year fixed rate FHA loan will have an interest rate of 3.63% while for a conventional loan the interest rate will be 4.3% on average. However, it has to be kept in mind that although FHA will provide a lower interest rate the monthly payment for conventional loans may be lower because of the difference in down payment.
- Loan amount: One of the key advantages a conventional loan has over an FHA sometimes is the amount you can take for a loan. Conventional loans can cover a very high dollar value, but the amount for an FHA may be limited.
- Mortgage Insurance: Another advantage of a conventional loan is that you generally don’t need private mortgage insurance if you make a sizeable down payment. On the other hand, FHA loans almost always have PMI attached.
Now that you know the fundamental differences between conventional and FHA loans, hopefully, it will make it more transparent for you on how to approach applying for a home loan. If you still have questions, we are ready to help you at any point in the loan application process.