FHA Loan vs Conventional Loan with 5% Down

Mortgage101

Taking out a home loan is a big decision and home buyers have a lot of work to do to make sure they are getting the best mortgage for their money. The type of loans available today are varied, giving home buyers a number of choices for financing the purchase of a home. Loans insured by the Federal Housing Administration (FHA) may be right for some people while conventional loans afford other options. When it comes down to considering an FHA loan vs. a conventional loan, home buyers should explore their options in light of their unique situation.

Conventional Loans

Getting qualified for a conventional loan can be difficult if the home buyer’s circumstances aren’t right. In today’s economy, where banks and lenders have experienced issues with loan defaults, many lenders are wary of giving loans to people who may be considered a risk, even in a small way. The Federal National Mortgage Association, known as “Fannie Mae,” and the Federal Home Loan Mortgage Corporation, known as “Freddie Mac,” provide guidelines for writing and selling conventional loans. Guidelines include minimum down payments (usually between 5% and 20%), income requirements and borrower credit scores. If home buyers don’t meet the minimums, additional fees may be charged.

With conventional loans, many fees, interest rates, and other costs are often higher and they are reflected in a higher loan amount.

FHA Loans

Because FHA loans are insured by the Federal Housing Administration, lenders are more likely to have offers attractive to home buyers that have specific needs. For example, an FHA loan may offer low down payments, low closing costs and a credit qualification process that makes it easier to quality for a loan, even in light of a difficult financial history.

One option FHA loans offer to home buyers is that of buying a “fixer upper” and using loan money to make repairs. Depending on the type of FHA loan, buyers may be able to roll the cost of energy efficient updates into the loan or buyers can choose a loan that allows them to purchase a prefabricated home, rather than a traditionally constructed one.

An FHA loan’s down payment requirements typically hover around 3.5%, however, because lenders who grant FHA loans help people with financial issues, there are additional stipulations involved. For example, homes must generally meet certain conditions before they can be purchased and home buyers may be required to purchase a specific type of insurance on the loan.

Pros and Cons

FHA loans and conventional loans will affect the mortgage, depending on the needs of the buyer. While some people need to be approved for a loan while carrying financial baggage, others prefer to operate outside of the constraints an FHA loan may impose. Home buyers will need to asses their financial situation and pursue a mortgage that matches their financial needs.

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