You’re looking to buy a home, but acquiring a loan may be a problem. Your financial situation isn’t quite up to the standard that most lenders require. What can you do? Well, instead of a conventional real estate loan, you might consider a Federal Housing Association (FHA) loan. FHA loans are offered to people who don’t qualify for regular loans. So what’s the difference between the two types? There are quite a few. Let’s take a look.
Conventional Loans require good credit and a stable financial background in order to qualify.
FHA Loans can be secured with a much lower credit score. In most cases, the minimum is 500, but under certain circumstances, arrangements can be made for people with scores of 499 and under, if they have a non-traditional credit history, or simply haven’t built up enough credit.
Conventional Loans may require a minimum down payment of up to 20%.
FHA Loans have a much lower minimum down payment, and depending on your financial situation, may be as low as 3.5%. To qualify for a 3.5% down payment, you must have a credit score of at least 580. For scores of 500 to 579, the minimum down payment is 10%.
Conventional Loans require no mortgage insurance unless the loan to value ratio is 80% or higher.
FHA Loans are subject to insurance in all cases, often for the full term of the loan. The insurance premiums, including a Mortgage Insurance Premium upfront and annual premiums thereafter, can drive up the overall cost of the loan over time.
Conventional Loans can be taken out for any amount that the lender and borrower agree on. There is no upper limit.
FHA Loans are limited to a maximum of $625,000 and may be even lower in some regions.
Conventional Loans may come with prepayment penalties. Depending on the lender, repaying the loan ahead of schedule may cost more than paying it on schedule.
FHA Loans have no prepayment penalties.
Conventional Loans have practically unlimited lender options. Nearly every bank offers home loans, and you can shop around and choose the loan that best suits your financial situation.
FHA Loans must be obtained from a pool of lenders specifically approved by the FHA.
Conventional Loans typically impose all closing costs onto the borrower—e.g. appraisals, credit reports, etc.
FHA Loans may have some of their closing costs covered by the sellers or builders of the property, as an incentive for the borrower to buy it over a different home.
These are just a few of the differences between FHA loans and conventional loans. In general, conventional loans are more flexible, but FHA loans offer lower mortgage rates and easier, more accessible repayment options.
Just because you have poor credit, or can’t make an exorbitant down payment all at once doesn’t mean you have to forego buying a home. Talk to a real estate agent and let them help you figure out if an FHA loan is the right choice for your current financial situation.
What Are the Differences Between an FHA Loan and a Conventional Real Estate Loan?