When you’re ready to purchase a home and apply for a loan through a bank or financial institution, there are two main types of mortgages to consider. Both FHA and conventional mortgages are the most common for borrowers to obtain. Each have their benefits and drawbacks, which should carefully be weighed to determine the best option for your long-term goals and financial standing. If you are deciding between an FHA and conventional mortgage, consider the following pros and cons before making a final decision:
FHA Loans are Ideal for First-Time Buyers:
One of the most common struggles for home buyers is saving enough money for the down payment of a property. Conventional mortgages require an average of 10 to 20 percent of the selling price of the home to be paid, while FHA loans only require 3.5 percent to be put down with a credit score of at least 580. This makes it easier to obtain a loan, but also requires a mortgage insurance premium.
More Options with a Conventional Loan
FHA loans can typically only be used on homes that are under $650,000, but conventional loans do not have a limit. Borrowers are also free to have multiple conventional loans and even have more lenders to choose from than FHA loans. Additionally, there are not any restrictions on the type of properties that the conventional loan can be used for.
FHA Loans are Limited to Owner-Occupied Properties
FHA loans may seem too good to be true to many borrowers, but one of the main drawbacks is that they’re limited to owner-occupied properties and can’t be used on vacation homes or investment properties. Many condominiums are also not approved for FHA loans, and borrowers are not able to obtain multiple FHA loans.
Conventional Loans Offer Flexible Terms
Although you may be paying 10 percent of a down payment to obtain a conventional loan, buyers have more options with the length of the loan term. This allows borrowers to qualify for a 30-year fixed loan, which will lock in their monthly mortgage payment. Lenders are also willing to offer 7-year ARM or 10-year fixed mortgage. Another perk is that borrowers aren’t subject to having to obtain a mortgage insurance policy with conventional loans.
When it comes to deciding between an FHA and conventional mortgage, there are several pros and cons to both options. Before choosing the best option, borrowers must first analyze their financial standing and credit score, the purpose of the property, and their long-term goals with the home.
AUTHOR BIO: This article was written by Dixie Somers, a freelance writer who loves to write for business, finance, and women’s interests. She lives in Arizona with her husband and three beautiful daughters. Dixie got advice for this article from the professionals at USDA Loans Direct who specialize in USDA home loans.
Photo credit: Flickr Creative Commons via Mark Moz