In the past we have discussed USDA 502 Direct loans on this blog and how this product is a great option for rural families with lower incomes. However, our commitment to creating prosperous neighborhoods and successful homeowners in Appalachia extends to families of all income levels. Two types of loans that higher earning households often consider are Federal Housing Administration (FHA) loans and Conventional loans. This blog post will discuss what each loan offers and why you might consider one above the other.
Federal Housing Administration (FHA) Loans are backed and insured by the Federal Housing Administration. They typically have a lower down payment amount with assistance available for those who qualify. They are often thought of as a first time homebuyer loan but they’re good for anyone, especially people who have a smaller debt-to-income ratio or don’t have a lot of cash in the bank for reserves. They are also available to people who have a less-than-perfect credit score.
FHA loans also have a shorter time restrictions for people recovering from major credit issues such as bankruptcy or foreclosure. The time period for an FHA loan is 3 years instead of 7 for foreclosure and 2 years instead of 4 years for bankruptcy.
The appraisal process for an FHA is more astringent that others, requiring the inspector to address any health or safety issues and require repairs or modifications before closing. While this may seem a hindrance, it came greatly favor the buyer of the home and help them to avoid costly repairs or hazards.
FHA loans are also assumable meaning that if the home was sold before the term of the loan, the new buyer can assume the interest rate and mortgage balance, which is particularly tempting if it’s at a low rate.
The homebuyer can also take on a non-occupant co-borrower to help qualify for an FHA loan.
- Low down payment with assistance available for qualified homebuyers
- Lower minimum credit score
- FHA Loans are assumable
- Shorter period of time after financial hardships
- Non-occupant co-borrower
Conventional Home Loan
Conventional home loans have a lot of their own advantages despite the requirement of a higher credit score.
First, there is no required up front mortgage insurance as there is with an FHA. Secondly, if the home buyer borrows less than 80% of the value (20% or more down payment) then a mortgage insurance premium isn’t required. In many cases, by having the money available upfront, the homebuyer may have lower monthly payments than an FHA loan with the minimum down payment.
Conventional loans can be fixed-rate or adjustable rate and depending on the length of the mortgage, specific ones may prove to be better.
A fixed-rate mortgage has an interest rate that won’t change for the life of the loan. Adjustable Rate Mortgages (ARMs) feature a fixed interest rate for a small period of time, typically 3 to 10 years, and then fluctuate up or down for the subsequent years. ARMs are typically sought by people who plan on moving from the house within a few years.
If the homebuyer doesn’t place 20% or more for the down payment, private mortgage insurance (PMI) can be eliminated when the loan to value is paid down below 80%.
Conventional loans can also be used to borrow a greater amount than FHA loans and can also be used to purchase investment properties and second homes.
- No Upfront mortgage insurance
- No Mortgage insurance required with 20% down payment
- Less strict appraisal standards
- Mortgage insurance can be eliminated at 80% LTV
- Can be used for investment property
No one loan is better than the other, but some loans are a better fit for certain homebuyers. The above information is not exhaustive and for more information on FHA or Conventional loans contact a mortgage professional.