Have you decided to purchase a new house or you simply plan to refinance your old house? Are you in need of a loan? Well, it is quite understandable that the big question that bother people’s mind at this juncture is: should I go for a Federal Housing Administration (FHA) loan or a conventional loan? While the types of loans have pros and cons peculiar to each of them, some loans are more suited for certain individuals, on the basis of financial status, than others. Find below a guide to choosing between a FHA loan and a conventional loan:
What is a FHA loan?
A FHA loan, appropriately referred to as a Federal Housing Administration loan, is a type of loan offered to individuals with a low amount of credit (about 500 credit score) and insured by the Federal Housing Administration. The loan is often offered to such individuals, because the lending body is not put at financial risk as the loan is guaranteed by the Federal government.
Who should go for a FHA loan?
If you are low on credit and need to purchase a new house or refinance your old house, going for a Federal Housing Administration (FHA) loan would be best for you, as the credit score needed to qualify for this loan is only 500, as opposed to about 640 credit score required to obtain a conventional loan. Also, only a 3.5% down payment is required for the approval of a FHA loan, as opposed to about 5 to 20% required by conventional loans. So, if your credit is very bad and you really need to do something about your house, going for a FHA loan is best.
What is a conventional loan and who should go for it?
A conventional loan is a type of loan granted to individuals with a very high credit score. The requirements for a conventional loan are much more demanding than the requirements needed to secure a Federal Housing Administration (FHA) loan. It should be noted that conventional loans are of two types:
- Conforming conventional loan
- Non-conforming conventional loan
Conforming conventional loans are loans that have terms and conditions which comply with the guideline dictated by the loan provider, such that the maximum amount of loan that can be granted is not exceeded.
However, non-conforming conventional loans are loans that exceed the maximum amount that can be granted to any loan seeker, as stated in the guideline of the loan provider. It should be noted that, non-conforming conventional loans are distributed on a smaller scale as opposed to the conforming conventional loan, and the borrower is thus, charged higher interest rates.
Furthermore, as opposed to the limitation in loan amount that can be granted by the FHA, conventional loans are much more flexible, as they give borrowers a free hand, when it comes to the amount of loan that can be requested.
Also, conventional loans do not require payment premium mortgage insurance, as opposed to FHA loan, which requires such.
So, if your credit is good, you need some serious amount of money and you do not want to pay premium mortgage insurance, then, go for a conventional loan.
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