FHA or Conventional

So you've decided you want to buy a new home. If this is your first one or hundredth the process is very simple. Your first step is to get preapproved for a mortgage so you know how much home you can afford. There are many options out there & many lenders who want you to choose them. I am in no way a professional when it comes to mortgages but I have had to deal with them on the buying & selling end as well as the refinancing end. I can tell you a few key things that might help you decide which way to lean. Let's take a look at the two most common types of mortgages FHA & Conventional.

FHA loans are government backed loans available at a lot of banks, credit unions, mortgage brokers, etc. These are usually available for first time home buyers, not that people can not get them later in life, but most people are usually more financially able to get a stricter loan. FHA loans offer low down payments which can be 100% gifted. They also offer down payment assistance programs to help you come up with the funds needed. FHA loans allow for more flexible credit scores & debt to income ratios. The interest rates are also sometimes lower than more conventional loans. Terms are usually 30 years fixed, but they do offer both 15 year fixed & adjustable rate mortgages. Mortgage insurance is always required with these types of loans & usually last the duration of the loan. They also allow non owner occupants to be co-borrowers (think parents that are not living with you here). The actual loans however are issued for owner occupied homes only, they are not giving these to us investors. Should you decide at a later date to refinance the loan FHA's make the process easier by not requiring new credit checks or income verifications. These loans also come with the ability to allow others to assume your loan at a later date if you want to sell. Lastly when considering an FHA loan keep in mind that they require an appraisal. This is nothing new as most mortgages do require an appraisal to protect their investment, but with an FHA loan the appraiser may find items that need fixed or repaired for the safety & well being of the applicant. Do not confuse this with a home inspection because it is not, you are still encouraged to have one in addition to this. Repair requests are fine if you have a seller willing to make the repairs. However if dealing with a bank owned property, they will not make repairs & may not allow you to do so either, which can ultimately cost you the deal.

Conventional loans in contrast are loans issued by banks, credit unions, mortgage brokers, etc. but are not backed by the government. These are funded by the banks & credit unions providing them. These are available for everyone with approved credit. So the credit scores need to be a bit higher on these. The down payments are normally on the higher end as well but conventional loans allow some of the cost to be added back into the loan. There is no down payment assistance programs & they only allow a portion of the down payment to be gifted. They also do not allow people not living in the house to co borrow. Conventional also have stricter debt to income ratios than FHA. However the interest rates are pretty competitive. They also offer many different terms from 5-40 years as well as various flexible & fixed rate options. Mortgage insurance is only required if have less than 20% equity in the home. Once your equity reaches 78% however this cost goes away. The actual cost of the insurance is cheaper than an FHA loan. Conventional loans allow for a higher loan amounts. Properties do not have to be owner occupied so this could be a great loan for investors. Any refinancing will be done with a whole new loan & a new credit check, income verification, etc. will need completed. These are also non assumable loans, so anyone wishing to sell later will need a buyer with their own loan. Conventional lenders are not as concerned with the condition of the home, so repairs will not be required to be completed in order to seal the deal. The appraiser is strictly going to review the current value of the property to make sure it is worth what the bank is giving you for it.

Each loan has it's own pros & cons so it's best to consult a mortgage expert to help you decide which is right for you. In the grand scheme overall the FHA are cheaper to get into with less strict issuing guidelines, however they normally cost you more over the life of the loan. They also can potential kill the deal if the seller is not willing to make repairs the appraiser is indicating needs done. Ultimately though you will have to look at your own needs, financial situation & long term goals to determine which is right for you. Good luck!