There are many, many considerations prospective homeowners face during the home search. And while the Cushing Team here in Reno can’t help you decide between that beautiful house with three bedrooms and the one that backs up to the golf course, we can help you figure out the best loan option for your budget and needs. Here’s what to know about the differences between conventional and FHA loans.
Conventional loans fall into the “open market” category, meaning they aren’t directly government backed in the same way as FHA loans. Free market investors on the open market buy investment instruments that contain conventional loans, which are designed for lower risk, higher credit borrowers.
FHA (or Federal Housing Administration) loans are part of a government-backed program that requires a 3.5% down payment.
Conventional Loans 101
Conventional loans can be categorized as conforming or non-conforming. Conforming loans comply with guidelines established by Fannie Mae and Freddie Mac, which are companies that purchase mortgage loans from lenders, package them into securities, and then sell to investors. The guidelines dictate specifics like loan amount, credit requirements, borrower income, and down payment.
Loans greater than the maximum amount set by Fannie Mae and Freddie Mac qualify as non-conforming loans, or jumbo loans. These are less common, with higher interest rates.
Conventional loans offer more flexibility in terms of loan amounts, and there are fewer provisions. If a borrower can put down 20% or more, mortgage insurance isn’t required. Those with higher credit scores may also get better interest rates with a conventional loan.
FHA Loans 101
The government doesn’t lend the money directly in an FHA loan, but it does guarantee the loan. That enables lenders to offer competitive interest rates. An FHA loan can be a good option for borrowers who need flexibility with credit qualifying guidelines. Currently, guidelines require a credit score minimum of 500 with 10% down, or 580 with 3.5% down. However, individual lenders can set their own credit requirements, so keep that in mind when you’re shopping. Mortgage insurance, which protects lenders from loss in the event of a default, is also required.
The Big Takeaway
FHA loans can be easier to get, but come with mandatory mortgage insurance and more requirements. With a conventional loan, you’ll need better credit and more money down, but there are fewer provisions.
Deciding which is right for you will depend on many factors. Fortunately, the Cushing Team can answer your questions and offer recommendations based on our many years of experience. If you have a mortgage loan question, we’re here to answer it!