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FHA vs. Conventional Loans Thumbnail

FHA vs. Conventional Loans

A milestone for many, purchasing your first home is undoubtedly an exciting experience. From more space to explore untapped hobbies to upgraded appliances that feature more than just the basic necessities, a new home offers countless benefits to those accustomed to apartment living or renting. However, before the real estate agent hands you the keys and you enter your brand-new abode, you need to first find a loan that accommodates your income, spending habits and more. 

For first-time homebuyers, the thought of a large mortgage may seem daunting at first, but with the right strategy and measures in place, you should be able to find a loan that will work well for your situation. The key to responsible loan management is making sure you are aware of how much money is coming in each month versus how much is going out.

Key Distinctions of FHA Loans

You may be wondering, “What does FHA stand for?” As the largest mortgage insurer in our world today, The Federal Housing Administration (FHA) helps people across the nation achieve homeownership, in addition to offering rental and healthcare insurance programs.1 While these loans are regulated and insured by FHA, your money will actually come from private lenders, instead of the government entity.2

When deciding between an FHA loan and a conventional loan, it’s important to consider the percentage of down payment required. If you’re on a tight budget, the FHA loan’s 3.5 percent down payment requirement may be the more suitable option for you.2 Another concern of many first-time homeowners is their credit score. Maybe you haven’t been able to establish a long history of good credit yet, or maybe you went through a period where you were unable to make payments on time. Fortunately, when compared to most conventional loans, FHA loans don’t require as high of a credit score, which could make an FHA loan more appealing to those who are still working towards improving their credit score.2

Another important consideration is the maximum amount of money you can borrow. If you’re interested in an FHA loan, you may not be able to borrow the complete sum of money you will need to secure your first house. To determine your mortgage limit, visit the U.S. Department of Housing and Urban Development’s website.3 

Conventional Loan Advantages and Disadvantages

A key differentiator between FHA loans and conventional loans is that conventional loans are not related to any government program or entity.4 And while they do not carry as many provisions as FHA loans, they require a higher credit score and more money up front, which could make them more difficult to obtain.

Conventional loans are broken up into two key categories: conforming and non-conforming. As you might guess, conforming loans have rules attached to them, such as a maximum loan amount. Other restrictions are set by businesses that provide financial support for conventional loans.4

Non-conforming loans, on the other hand, are more flexible depending on the lender. From eligibility to pricing, there are a variety of options out there when shopping for a non-conforming loan. However, it’s important to note that some conventional loans require mortgage insurance, so make sure you do some research before committing to one loan over another.4

Pick the Option That Suits You Best

Before deciding on an FHA loan or a conventional loan, consult a range of lenders and obtain quotes so you have a decent understanding of what options are available to you. A loan is a big commitment and carries a lot of responsibility, especially for first-time homeowners. Never commit to a loan until you are 100 percent aware of its requirements and limitations, and certain that you will be able to make your monthly payments.

There are many types of loans out there and a variety of pros and cons attached to each of them. When it comes to borrowing money, it’s important to consider all your options before committing to the long-term expense of a mortgage. When in doubt, consult a financial professional. As helpful as research is, there is no replacement for professional expertise and real-world experience.

  1. https://www.hud.gov/federal_housing_administration
  2. https://www.consumerfinance.gov/owning-a-home/loan-options/fha-loans/
  3. https://entp.hud.gov/idapp/html/hicostlook.cfm
  4. https://www.consumerfinance.gov/owning-a-home/loan-options/conventional-loans/

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.