At a glance, home loans seem simple—you borrow money from a loaning company to buy a house and then pay them back over some time. However, when you’re planning to secure funding for a property soon, you’ll find that there are quite a few complexities when it comes to home loans!
One of the first things you’ll want to investigate when you’re looking for a home loan is whether or not you want a Federal Housing Administration (FHA) or conventional loan.
There’s a lot of confusion surrounding these two loan types, so we’ve broken them down for you so that you can figure out which loan option is best for your needs and circumstances.
What Is an FHA Loan?
An FHA home loan is insured by the Federal Housing Administration and backed by the U.S. Department of Housing and Urban Development (HUD). This mortgage option is designed primarily for home buyers with limited funds toward a down payment.
Several different FHA home loan options include FHA forward mortgages, FHA mortgages, FHA home loans, and first-time homebuyer loans. However, FHA loans are only available for primary residences and are not available for investment properties.
The FHA’s primary interest is ensuring that homebuyers can complete their home loan payments, even if the economy takes a downturn. In fact, the FHA’s loan requirements are often stricter than conventional loans; this means that FHA home loans typically come with higher interest rates than conventional loans.
The FHA is generally the best loan option for first-time homebuyers, low-credit score borrowers, and those who may face a challenge securing a loan at a lower rate.
What Is a Conventional Loan?
A conventional home loan is a home loan that is not insured or guaranteed by an agency like the FHA. Unlike the FHA, conventional home loans are typically backed by private investors, not the government. This means that only borrowers who meet specific credit and income requirements are eligible for conventional home loans.
Conventional home loans are one of the most customizable home loan options available. In addition, conventional loans usually come with a lower interest rate than FHA loans, making them a better option for those who plan to pay off their mortgage in a few years.
It’s important to note that conventional home loans not only come from banks and mortgage lenders but from a variety of other companies as well. This can include real estate agents, home builders, investment firms, and more. When looking for a home loan, you’ll need to discuss your loan’s terms and conditions with several different lenders.
What Loan to Choose?
If you’ve been approved for an FHA loan and a conventional home loan, and both rates are within your budget, it’s worth trying for a conventional loan; the lower rate can save you thousands of dollars in interest charges over the life of the loan.
However, if you have limited funds to put toward a down payment, are new to buying a home, have a low credit score, or are a member of a minority group, an FHA loan may be the better option.
Due to the stricter lending requirements of the FHA, you stand a greater chance of being approved for a loan, which will give you access to financing that may not have been available through a conventional loan.
There’s a lot to consider when looking for a home loan—whether you’re buying a home or refinancing. Figuring out which loan to choose is a great start, but you’ll also want to think about the interest rate, the loan’s closing costs, and when you plan to pay off your loan.
If you’re ready to buy your dream home or refinance your current loan, get in touch with one of the best mortgage lenders in the United States, Waymaker Mortgage! We can help you complete your loan questionnaire and customize a mortgage plan of action that meets your goals. Book a call with us to get started!