Deciding between an FHA loan or a conventional mortgage can be confusing. Both types of loans offer low down payments and flexible qualifying requirements. And benefits such as no private mortgage insurance (PMI) for certain applicants.
Even if you are looking for loan options for bad credit. However, it’s essential to understand the differences between these two loan types before making a decision. Let’s break down how each type of loan works.
FHA Loans
FHA loans are insured by the Federal Housing Administration (FHA) and are designed to help low-income borrowers purchase a home without making a large down payment. The minimum down payment for an FHA loan is just 3.5%. Additionally, FHA loans come with more lenient credit score requirements than conventional mortgages; you may be eligible for an FHA loan with a credit score as low as 580. On the other hand, conventional mortgages typically require a credit score of 620 or higher.
One of the advantages of an FHA loan is that it allows you to finance up to 96.5% of the home’s value. Meaning you can potentially purchase a home with very little money down. This makes it an excellent option for first-time homebuyers who may not have enough saved up for a 20% down payment on a conventional mortgage.
For example, with an FHA loan, a buyer can purchase a $200,000 home with just 3.5% down, or $7,000. On the other hand, if they were to get a conventional mortgage for the same amount. They would need 20% down ($40,000). An FHA loan is much more accessible for buyers with limited funds saved up.
The downside of FHA loans is that they come with higher fees than conventional mortgages. For example, if you take out an FHA loan for $150,000 with only 3% down. You will have to pay an upfront mortgage insurance premium of 1.75% plus an annual premium of 0.85%. These fees can add up quickly over time and significantly reduce your overall savings on loans.
Conventional Mortgages
Conventional mortgages are not backed by the government and tend to have stricter qualification standards than FHA loans. For example, while most lenders will approve borrowers with credit scores as low as 620 for conventional mortgages, some lenders may require a minimum credit score of 680 or even 700 to qualify for specific programs and rates.
On the upside, however, there are usually no required upfront fees associated with taking out a conventional mortgage like there are with an FHA loan—so if you qualify for one. It could save you money in the long run.
Additionally, some lenders offer special loan programs with even lower down payments than the traditional 20% for conventional mortgages. For example, you can purchase a home with just 10% down or even as little as 3% down. However, these low-down payment options can also come with higher interest rates and stricter qualification requirements.
The advantage of a conventional mortgage is that it may offer better interest rates and lower monthly payments compared to an FHA loan. This is because lenders view borrowers with higher credit scores and larger down payments as less risky. So they may be more willing to offer lower interest rates. In addition, private mortgage insurance (PMI) is not typically required with conventional mortgages – while FHA loans always require PMI.
Conclusion
When it comes to deciding between an FHA loan or a conventional mortgage. There are many factors to consider before making your decision when looking for loan options for bad credit—including your credit score, budgeting ability, and monthly expenses—so it’s essential to do your research before committing to either option. Talking things over with a qualified lender can help guide you when choosing the right type of loan for your situation to get the best possible deal available on your new home purchase!