With mortgage rates being at record lows, many people are ready to purchase a home or refinance their existing mortgage. If you are one of the many Americans who want to take advantage of one of the best times in many generations to buy or refinance, you are probably weighing the loan options that are available to you.
If you are a first-time home buyer or have not thought about your existing mortgage in years, it may be hard to tell which loan type will be the best for your situation.
Two of the most common loans right now are conventional, fixed-rate mortgages & the government-backed FHA loan. Each loan offers unique features that benefit different situations. Knowing some of the advantages and drawbacks of both loans will help make your decision easier:
Similarities between Conventional & FHA loans
- Both loans currently offer some of the lowest rates in history. 15-year conventional fixed-rate mortgage rates are at an all-time record low. FHA rates are slightly higher but in general, rates are competitive and comparable.
- The most popular FHA & conventional loans are fixed-rate mortgages. That means the interest rates won’t change for the life of your loan.
- However, both conventional & FHA offer ARMs (adjustable rate mortgages).
Advantages of an FHA Loan over a Conventional Loan
- Credit qualifying criteria not as strict – Credit scores as low as 620 now qualify for an FHA loan. Additionally, your allowable debt-to-income ratio is higher on an FHA. Meaning, if the amount of debt you carry is relatively high compared to your income you may still qualify for an FHA loan.
- Low down payment required – FHA loans generally require as little as 3.5% down on the purchase of a home. Government requirements also feature some of the lowest amounts needed to close a loan, potentially leaving more money in your pocket at closing.
- Easy Refinancing – Refinance up to 97.75% of your home’s value. FHA also offers an FHA Streamline which allows you refinance with no appraisal and minimal credit requirements.
Benefits of a Conventional Loan vs an FHA Loan
- Most competitive mortgage rates – Due to the FHA approving loans for borrowers with lower credit, there is a greater risk associated with those types of loans, meaning the rates are generally slightly higher. Good credit requirements for conventional loans offer borrowers lower rates when compared to FHA loans.
- No MIP at closing – FHA loans come with mortgage insurance premiums (MIP) that are built in over the course of the loan. When you close, there’s also a one-time upfront mortgage insurance premium due – currently 2.25% of the total loan amount. Conventional loans do not require this upfront premium.
- Flexible terms – Conventional loans offer several repayment period terms. Different repayment terms offer different, more competitive mortgage rates. The faster your term, the lower your rate. Choose between 10-, 15-, 20-, 25- or 30-year repayment periods. FHA loans generally do not offer as many options.
If you have less than perfect credit and don’t have enough for the standard 5-20% down payment, an FHA loan may be the better option for you. If you have good credit, a stable job and a sizable down payment – you could save more money over the life of your loan by going with a conventional option. If you need more help figuring out which option best suits you, you can always reach out to a Home Loan Expert or your financial advisor. But be sure to act quickly as these low mortgage rates are not going to last forever.