Which Is Better for You: Which Is Good? FHA vs. Conventional Loan
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If you're in the market to buy a new home, you may be wondering if now is an excellent time to get a mortgage, as mortgages are a big part of life. In addition, a mortgage is the most significant debt they will ever take on for most people. Therefore, it's essential to understand the differences between the types of mortgages offered by mortgage lenders to make the best decision for your family.
In this blog post, we'll compare FHA and conventional loans. These are popular choices for many homebuyers, which vary because of the type of home you want to buy, your financial stability, and the trade-offs you're willing to make. We'll learn the points of differentiation that differ between both loan types. It would help if you understood which mortgage is right for you by the end of this post.
The Loan-to-Value Ratio
FHA loans tend to have higher loan-to-value ratios in comparison to conventional loans. FHA loans have a minimum loan-to-value of 96.5%, meaning you'll need a 3.5% down payment. On the other hand, conventional loans allow borrowers to have a loan-to-value ratio of up to 80%. This means that you can have a much higher down payment if you go the conventional route. Now you must be wondering why there is such a huge gap. Why is the FHA loan-to-value ratio more elevated than that of traditional loans?
The answer is pretty much significant yet straightforward to know. The government backs FHA home loans, and therefore, they are more lenient when it comes to credit score requirements and down payments. As a result, they are an attractive option for first-time homebuyers because of their low credit scores and down payment requirements.
On the other hand, conventional loans are not backed by the government. They are offered by private lenders and follow stricter guidelines. The credit score requirements are higher, and the down payments are also higher. But, they have lower interest rates as compared to FHA loans.
Whether you have gone bankrupt or have made late payments of installments in the past, getting approved for an FHA loan is more accessible than a conventional loan. In addition, FHA loans have lower credit score requirements than conventional loans.
Mortgage Payment Insurance
If you intend to put less than 20% down on a conventional loan option, you will be required to purchase private mortgage insurance. It is a type of compensation that protects the mortgage lender from losses if you default on your loan. This can add a significant amount to your regular monthly mortgage payments. However, once your loan-to-volume ratio lowers to 78%, your lender will stop adding PMI charges to your monthly payments. On the other hand, FHA loans pay an up-front mortgage premium and the monthly insurance premium, which is rolled into your mortgage payment.
In the case of refinancing, the borrowers have to go through the same time-consuming process. For instance, you are processing the loan application process again and paying closing costs and fees again. You are pretty lucky if you are an FHA loan holder because the FHA streamline refinance program lets you refinance your existing loan to a lower rate without going through the entire loan process. What's more is that there are no closing costs involved in an FHA streamline refinance, and it only takes minutes to fill out the necessary paperwork required.
Conventional loans in Missouri do not offer such a streamlined refinancing option, and the process can be pretty costly and time-consuming.
FHA loans have lower rates than conventional loans regarding mortgage interest rates because the government backs them. This results in lenders being willing to offer lower interest rates on FHA loans.
The Bottom Line
The decision between an FHA loan and a conventional mortgage is not always clear-cut. However, sharpened with the information in this blog post, you should be able to decide which type of loan is best for you. If you are still unsure or have any other questions about mortgages, please consult a qualified mortgage lender. They will be able to answer all your questions and help you find the best mortgage for your needs. Thanks for reading!