Buying a house can leave you feeling overwhelmed and under-informed. You have so many mortgage loan options in front of you, it's hard to know where to start. From the conventional mortgage to FHA loans...from zero-down loans to adjustable rate mortgages, it's a difficult task to cover all of them.
Instead of comparing every mortgage loan option you have in front of you, let's take a look at 2 of the most popular loans in the housing market: Conventional vs FHA.
Let's start with conventional. A conventional mortgage is often one of the lowest-priced mortgages when it comes to your interest rate. It’s also one of the most costly loans up front. A typical conventional mortgage requires the borrower to have a 20% down payment. Then you simply borrow the rest from the lender. Because you’re putting more money down, you’re starting with more equity than a borrower who would have a smaller down payment.
it also means that if you're buying a $100,000 home with conventional, you're actually borrowing $80,000. Your payment would be smaller because you're borrowing less overall. You also will likely avoid private mortgage insurance. That's the insurance you pay to the lender when you have little equity built up. It's a lender protection situation, in case you're not able to pay your bills.
With FHA loans, the borrower only needs to have 3.5% down to get the mortgage. This means for a $100,000 house you're borrowing $96,500 and coming up with $3,500 for the down payment. It's a more affordable option for many home buyers. But this means you'll pay some kind of mortgage insurance and your monthly payments would be higher than the conventional mortgage borrower.
FHA loans have specific requirements when it comes to credit scores and debt-to-income (DTI). Although, credit score requirements tend to be a bit lower than other mortgage loan programs. The general rule for FHA debt-to-income ratios is that your house payment should not exceed 31% of your income. Adding your house payment to the rest of your debt should keep your total debt at or below 43% of your income. Higher ratios may be considered with compensating factors. FHA has no income limit and no geographic restrictions. You can also have non-traditional credit – great for self-employed borrowers.
Another bonus to FHA loans is the home improvement loan FHA 203k. This loan allows you to buy a home based on the after-improved value after renovations and upgrades are complete, and roll those home improvements right into the mortgage loan amount. It's a great option for first time home buyers to get their dream home tailored to their own tastes and wants.
When it comes to conventional mortgage vs FHA loans, it really depends on you. Do you have a savings you can use for a larger down payment? Or do can you take the time to save up the 20% you would need for this? Or is a 3.5% down payment more within you reach? You will also want to consider whether you're willing to pay private mortgage insurance.
Education is key when it comes to deciding what's right for you. Get more information on your choices in a concise guide that covers your options for buying a home. Download "The Only Mortgage Loan Options Guide You Need" at the button below. The 12-page guide covers options from conventional mortgage loans to home improvement loans. Get your free copy today and get started on the home buying process.