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Conventional or FHA

Loan types: Conventional vs. FHA – In the process of purchasing a home it’s vital to know the difference between the Conventional and FHA loans. Each loan type has its positive and negative aspects.

It’s widely known that there are several options of getting a loan for buying a home: a Conventional loan or FHA loan. Each option has certain advantages and disadvantages. In case you are a first time home buyer, you are likely to have only a vague notion about how to buy a house. Look at the brief overview below to have some idea of the often confusing world of mortgage loans and modern home ownership.

Conventional loans

A conventional loan is a loan neither issued nor insured by a government entity. The borrower will have to meet strict requirements as to the credit score, his income and minimum down payment. To get an attractive interest rate you should have excellent credit rating otherwise you will have to pay some additional fees. Conventional mortgage loans have either fixed or adjustable interest rates and can also be conforming or nonconforming.

FHA loans

FHA loans are made by the lenders or banks approved by the Federal Housing Administration and are insured by the latter. In case the borrower fails to cover the costs of the loan the risks of the lender are reduced due to the federal government insurance. This should allow the lenders to offer the citizens with low income the terms and conditions, which such borrowers may not otherwise be able to afford

Aspects to Consider

When it comes to choosing between a conventional and FHA loan, a number of aspects should be considered.

The choice between the two loan types is usually determined by a number of subjective factors. A conventional loan, as well as FHA loan, requires a credit check, still conventional mortgages often require less time to be issued. You can get home equity into possession more quickly under the conventional loan because of higher down payments required and less administrative routine. Such loans are usually a perfect choice for the borrowers with a great credit rating, having certain savings and being able to afford large down payment. Federal Housing Administration loans are usually the choice of the first-time home buyers. Such loans are characterized by less strict demands for a credit score and lower down payment requested. That makes the FHA loans easier available for the borrowers with less than perfect credit history, those who have been foreclosed or undergone bankruptcy.

DTI or the debt-to-income ratio is one more aspect, which differs in conventional and FHA loans. As a rule, the requirements to DTI ratio is varied in conventional mortgages depending on the lending institution policy. When considering a lender, pay attention to this factor. The debt-to-income ratio for FHA mortgages is regulated nationwide and there is a tendency for such loans to allow a higher DTI than the conventional ones.

Mind the two aspects of DTI - the front-end and back-end ratios. The first one takes into consideration the housing expenses only, while the back-end includes reoccurring debt costs as well. An applicant’ debt ratios must be at the set DTI ratio level or lower. InterestRatesMortgageLoans advises to start the application process with that information already calculated in such a way you will make all the formal procedures as smooth as possible.

In case the borrower has recently gone through bankruptcy or foreclosure, he can qualify for an FHA mortgage only 1 year after those events according to the “Back to Work” program started in 2013. When it comes to conventional loans, the duration is different with different lenders.

VA Mortgage Loans

Besides, there are also the so-called VA loans government-backed mortgages for veterans. The program is aimed to help the returning service members in purchasing houses of their own. Such loans are also issued by the FHA approved lenders and insured by the government.

The peculiarity of a VA loan is that no down payment is required, but such mortgages are not automatically offered as no-money-down loans. The borrower has to choose the house assessed by a VA-assigned appraiser and a notice of value should be issued. In case the price of the house exceeds the amount mentioned in the notice of value, the difference should be made up in cash.

In conclusion, we can’t but mention that all the aspects and options should be carefully considered before taking the first steps along the road to home ownership. You should make up your mind as to the type of the loan best suitable for your specific financial situation as each factor must be weighed on a case-by-case basis.