There are numerous ways to make the dream of buying a home a reality. Many first-time homebuyers opt for an FHA loan. When considering the differences between an FHA loan and a conventional loan, it is important to know the particulars of each.
The emotion of buying a new home or residential property can feel great. To avoid having the joy of new ownership turn to dread and regret, it can be helpful to self-educate on the options available.
What is an FHA loan?
These loans are backed by the government but issued by FHA-approved mortgage lenders. An FHA loan is insured by the Federal Housing Administration and is a mortgage that is backed by the government. The requirements to obtain an FHA loan can be less demanding than a conventional loan and were chosen 83% of the time by first-time homebuyers in 2020.
FHA loans versus a conventional mortgage loan
Conventional loans are not insured by the government like FHA loans are. Conventional loans requirements are higher than FHA loans. Let’s take a closer look at five differences:
- Credit score: FHA loans require a minimum of 500, while conventional loans start at 620.
- Down payment: FHA loans require a 10% down payment for a credit score between 500 and 579, and 3.5% is the credit score is 580 or above. Conventional loans often require a down payment between 3% – 20%.
- Loan terms: An FHA loan is either 15 or 30 years, while a conventional loan can be anywhere from eight – 30 years.
- Mortgage insurance: With an FHA loan, the premium can be upfront at 1.75% of the loan amount, or an annual payment of .45% – 1.05%. In a conventional loan that has less than a 20% down payment, the premiums can be between .58% – 1.86% of the loan amount.
- Interest type: FHA loans have a fixed interest rate, while conventional loans can be with a fixed or adjustable rate.
It is important to know the pros and cons of each loan type to make an informed decision.