Okay, you’ve finally said the words out loud, “I’m buying a house.” Eeek!! It’s a big deal! Especially for a first-time homeowner, and that experience can feel daunting when it comes to the loan process. We’re going to help break down a couple loans to help you understand your options better.
There are many types of loans available, dependent on a variety of circumstances. Our preferred mortgage lender, Meggan McDonald with Supreme Lending, has some great summaries of these loans on her website, along with the advantages that come with each loan. For today’s purposes, we will be focusing on one traditional loan (Conventional), and one government loan [Federal Housing Administration (FHA)] that we probably see the most of.
A Conventional Loan is insured by a private lender, not the government. To qualify for a conventional loan, you need:
- A higher credit score
- Lower debt-to-income ratio
- A down payment [Although you’re not required to make a 20% down payment, if you can’t cough up that cash, you’ll pay Private Mortgage Insurance (PMI), which basically protects your lender if you should default on your loan – psst, don’t do this!]
- More flexible inspection fixes – As a conventional loan holder, you can determine what you’d like to be fixed after an inspection report comes back; an FHA loan holder will have a bit more stringent requirements that could turn off a seller.
- Faster loan underwriting – These loans usually come with less paperwork and delays.
- Security – Interest rates are usually locked in, so buyers know what to expect with their monthly payment each year.
An FHA loan is backed by the government and insured by its namesake, the Federal Housing Administration.
- Lower credit score accepted
- Lower down payment
- Competitive interest rates with conventional mortgages
- An option if you have a lower debt-to-income ratio
- There is still a down payment required
- Mortgage Insurance Premium (MIP) is required and typically last through the life of your loan (until you put down 10% and then it comes off after 11 years)
- Loan limits are lower
- Stricter inspection requirements
The reality is, unless you’re buying a house with cash, you’re going to need a loan. There are pros and cons to any loan you look at, and hopefully we’ve helped break down the difference between two of the most popular loan options.