From location, to budgeting, to the right floor plan, there is a lot to consider when searching for the perfect home. In addition to choosing the home features that matter most, you are also faced with decisions about home financing.
To help you determine which loan program is right for you, we’ll show you some of the differences between two of the most common types of loans; government-backed FHA loans and Conventional loans.
The Basics of FHA Loans
FHA loans are insured by the Federal Housing Association and offer competitive interest rates. They are also known for having fairly flexible parameters ideal for first time home buyers such as: easier credit standards, low down payment options, less elapsed time required after financial hardships or derogatory credit events (foreclosures and bankruptcies), and higher debt-to-income ratios (DTI). FHA loans follow guidelines set by Fannie Mae and Freddie Mac with loan limits up to $424,100 for single family homes in all parts of the country. Limits go up to $636,150 for homes in designated high cost counties. If needed, you can even use a non-occupant co-borrower (who is a relative) to help you qualify for the loan. Gifted down payments are also allowed. But, FHA loans can be pricey in terms of mortgage insurance. An FHA loan requires mortgage insurance, regardless of the amount of the down payment. Both an upfront premium, which can be financed into the new loan, and a monthly premium are required. The monthly premium payment extends throughout the life of the loan and is a percentage of the loan amount borrowed on your home.
The Basics of Conventional Loans
Conventional loans follow the same Fannie Mae and Freddie Mac loan limit guidelines as stated above (up to $453,100 in all parts of the country and up to $679,650 in designated high cost counties). Higher limits apply to 2-4 unit properties. Any loans above the Fannie and Freddie limits are considered non-conforming or jumbo loans, which is a topic for another day! Conventional loans have more restrictive requirements than FHA with a lower maximum DTI of 45 percent and a higher credit score requirement (usually 620). But, if you can meet the requirements to qualify, a conventional loan may offer lower monthly payments. With a down payment of 20 percent or more, no mortgage insurance is required. Even if you put down less than 20 percent, the private mortgage insurance (PMI) charged to obtain the loan could potentially be a lot less than the FHA mortgage insurance premium rates.
The chart below compares the features of these loan types in an easy-to-follow format that will help you match your financial profile to the loan option that offers the most benefits.
For assistance evaluating the home financing options that will work best for you, contact a loan advisor near you.
Updated 11/30/17 to include 2018 Conventional Loan Limits