Jul 24, 2018 / Homes
Most homeowners will tell you that searching for a new home is an exciting time, right up until you start looking into mortgage loans. Confusing terminology and differences in loan options leave many would-be homeowners scratching their heads and looking for help. Luckily, by taking just a few minutes to learn about the most common loan types, your home search doesn’t have to come to a screeching halt at the first mention of mortgage. Here are a few key differences between FHA loans and conventional loans.
The most popular type of loan, conventional loans usually come with fixed interest rates and terms. According to the U.S. Census Bureau, conventional loans accounted for nearly 74% of new home sales in the first quarter of 2018. FHA loans, the second most common type of loan, made up less than 12% of loans in the first three months of 2018. FHA loans are insured by the federal government and usually allow the borrower to have lower credit and make a low down payment.
One big difference between conventional and FHA loans is that with FHA, the borrower is required to pay an upfront insurance premium and an annual premium (usually paid as part of a monthly mortgage). With conventional loans, if a borrower makes a 20 percent down payment, no mortgage insurance is required. If, however, the borrower puts less than 20 percent down, many lenders will require the borrower to pay for private mortgage insurance to obtain the loan.
Because FHA loans are insured, lenders can take on risker loans. And that means borrowers with less-than-ideal credit can qualify for this type of loan. In fact, some lenders will work with borrowers with credit scores as low as 600 on FHA loans. Conventional loans, on the other hand, usually required borrowers to have higher credit scores, usually around 620 and above.
For conventional loans, most lenders like to see a down payment of at least 1%. But again, paying less than 20% may trigger a requirement to pay private mortgage insurance. And because FHA mortgage come with mandatory FHA insurance, lenders typically require a smaller down payment of around 3.5% of the home’s sale price or appraised value.
Looking for a new home is an exciting time. And questions about which loan is right for you shouldn’t get in the way of finding the home of your dreams. If you have questions about FHA, conventional, or any other type of mortgage loan, visit Utah First Credit Union to check current interest rates or estimate your monthly mortgage amount with a convenient online loan calculator.