FHA mortgages are incredibly popular among first-time home buyers.
FHA home loans require very little down and can be acquired even with credit scores below 600. This makes FHA loans the natural first choice of many new home buyers. However, you may be surprised to learn that conventional loans have many benefits over FHA loans, and a conventional loan may even be a better option for your needs. In part one of this series, we touched on four reasons to choose a conventional loan over an FHA loan. Continue reading to learn about four more reasons:
Reason #5. Qualifications
The qualifications for conventional and FHA loans are very different. Credit requirements for FHA loans are looser than they are for conventional loans; however, FHA loans are stricter about debt-to-income ratios, as well as the source you use to pay for the loan. For example, you won’t be able to count some types of income from non-occupants or non-borrowers for an FHA loan, which can make it difficult for those who need outside help to pay for the down payment of the loan. To be clear, gifts can be used to cover down payments in FHA loans, but there are strict guidelines as to who can provide those gifts.
On the other hand, conventional loans require higher credit scores than FHA loans, but they also allow higher debt-to-income ratios, which makes them easier to qualify for if you have a lot of personal debt going into the loan application process.
Reason #6. Flexibility
Because FHA loans are backed by the government, they have incredibly strict requirements, and some lenders either won’t or can’t offer them. Conventional loans aren’t secured by the government, which means that you can get a conventional loan from virtually any lender, and it also means that lenders can offer more flexibility.
When you shop around for an FHA loan, the pricing is going to be very similar from lender to lender, but fees and pricing for a conventional loan can vary widely depending on the lender you choose.
Not only does a conventional loan allow for greater choice when it comes to finding a lender, but it also means more competition for lenders, which encourages greater flexibility to meet your needs. Lenders can make more accommodations for borrows’ needs with conventional loans, which may mean more relaxed underwriting requirements, fewer fees or the ability to raise or lower your interest rate based on the amount of your down payment at closing.
Reason #7. Additional Financing
When you choose to buy a home with an FHA loan, it can only apply to the value of the property, which means that any additional work that needs to be done to the home will have to come out of your own pocket. However, when you choose to buy with a conventional loan, some lenders will allow you to take out a loan that is over the value of the home.
This can be beneficial if you’re purchasing a property that needs some work, but it can also be used for other upgrades, like new furniture or improved landscaping. This allows you to purchase the home you’ve always wanted, even if you don’t have enough saved right off the bat for home improvement projects. However, it’s important to keep in mind that there will likely be finance charges associated with it.
Reason #8. Piggybacking
In part one of this series, we talked about private mortgage insurance (PMI), which covers the lender in the event that you default on the loan and is required when you can’t put at least 20 percent down, regardless of the type of loan you choose. With an FHA loan, the PMI never goes away, but with a conventional loan, it will automatically fall off of your monthly payments once you’ve paid the balance of the mortgage to 78 percent of the appraised value of the home. However, this isn’t the only benefit of conventional loans where PMI is concerned.
Conventional loans give you the option of avoiding PMI altogether by piggybacking. Piggybacking is when you take out two different home loans, one that covers 80 percent of the value of the home and one that covers 10 to 15 percent of the value (depending on your down payment). The second mortgage usually comes at a higher rate, but you won’t have to worry about having to pay for the monthly PMI.
There are many advantages to choosing a conventional loan over an FHA loan, but the truth is that both can be very beneficial in many ways. Choosing the right option for you will depend on your own individual circumstances and needs, and the best way to find out which one will work best for your needs is to sit down and talk with an expert. Get started today by scheduling your free consultation with our team of experienced lenders at Patriot Home Mortgage!