The debate of which is better, the FHA or the conventional loan has been there for many years and is still active to date. The answer to this is subjective and depends entirely on the specific situation of the borrower in terms of assets, income, and credit when buying a home. Below are some facts from Arizona Mortgage Pros that can help you gauge which of the two is better.
For the FHA loans, the credit requirements are much lenient as several lenders will accept borrowers with a credit of 600 middle FICO score. It is not an easy task to find lenders who will extend the same offer with conventional loans. However, if you’re lucky to find one, you will have to pay a sizeable down payment.
Both loan types can either have a fixed or an adjustable interest rate. However, the rates of interest are higher in conventional loans than in the FHA loans. This can be attributed to the fact that the traditional conforming loans are provided through private lenders while in the FHA, the loan is insured by the federal government.
If borrowers will not be paying the 20% down payment, especially on the lower credit score borrowers, then the mortgage insurance is essential. In conventional conforming loans, you will be required to have private mortgage insurance. However, the entities giving PMI need borrowers to have a high credit middle score. This makes the process of receiving mortgage insurance on conventional loans very difficult. These requirements are not required for FHA loans. The mortgage insurance premium on the FHA loan usually is paid upfront and is included in the monthly payments as well as the loan amount. This can be expensive in the long haul. FHA loans do not need credit card qualifications, and in addition, the mortgage insurance premium cannot be canceled despite the loan-to-value status. The only way to revoke mortgage insurance on the FHA loan is to refinance it to another loan type like the conventional loan.
Concession of the Seller
Another significant difference between the two loan types is the seller’s contribution to the closing costs. FHA loans allow up to six percent of the sales price. This implies that the seller must contribute six percent towards the borrower’s closing costs. The conventional loans, on the other hand, will only allow 3% of the borrower and consequently, the FHA loans go to closing and bring less money to the table.
Down Payment Requirement
Conventional loans require a minimum of 5% down payment, and the amount can be a gift from an immediate family member if the total down payment is at least 20% or higher. In the FHA loans, a down payment of 3.5% is required, and a family member can likewise gift the entire down payment.
It is clear from the above analysis that FHA loans are more accessible to home buyers. The loans are easier to process; easier to qualify, and the credit requirements are quite flexible. The down payment is also lower, and this makes it a popular choice among homebuyers. To get more information on these loan types, you can contact our Arizona loan experts at Arizona mortgage pros and get the best advice. Contact us today.