Are you currently shopping around for a loan, and feeling confused about the differences between FHA and conventional loans? It helps to know the main differences between them.
An FHA loan is backed by the government which allows people to purchase a home with a down payment as low as 3.5%. This is the requirement for any lender that you use to secure an FHA loan, and it will not change based on other factors regarding your finances.
Conventional loans have different down credit requirements, which will vary based on your credit score. While conventional loans can have a down payment as low as 3%, know that the minimum down payment may be different depending on the lender that you work with. If you have bad credit, it's possible that the lender will require a larger down payment because you are viewed as being a higher risk.
Be aware that both of these loans have different limitations in terms of if the home needs to be your primary residence. An FHA loan must be used for the main home that you live in, and cannot be used for a vacation home or rental property. However, a conventional loan doesn't have this limitation. You can use a conventional loan to buy a second home to use for leisure or investment purposes.
Private Mortgage Insurance
It is completely different from how private mortgage insurance works with these loans. An FHA loan will require you to pay PMI if you provide less than a 10% down payment on the home, and that PMI will be paid for the lifetime of the loan. The only way to get rid of PMI is if you refinance and get a new type of mortgage.
A conventional mortgage works a bit differently. You pay PMI when you provide less than a 20% down payment, but that PMI can be removed once you've reached 20% equity of your home. You do not have to refinance to get rid of PMI.
Everyone's county is different when it comes to the loan limits, which is how much you are allowed to borrow for a home. In general, you are going to see a lower loan limit with an FHA loan, while conventional loans typically have a higher limit. If you are looking into a really expensive home that exceeds the limits of a conventional loan, you'll need to get a jumbo loan.
Reach out to a mortgage broker like AJM Mortgage Inc for more information about these two types of mortgages.
When you start thinking more seriously about how to manage your finances, it is worth saying how important it is to find the perfect loan. While the right loan could help you to pay down debt without worrying a lot about the repercussions, the fact of the matter is that some people don't research loans as extensively as they should, causing problems. The purpose of this blog is to find great loans that could help you along the way. Check out these posts that talk about everything from narrowing down loans to identifying ways to identify lower interest rates. Check out this information to make sure you have what you need.