HOME BUYERS

Deciding between FHA vs Conventional Loans in 2024

When it comes to choosing a mortgage, homebuyers have several options. Two of the most popular types of mortgages are FHA loans and conventional mortgages, but what are the differences between the two, and which one is right for you?

 

FHA vs Conventional Loans

FHA loans are mortgage loans that are insured by the Federal Housing Administration (FHA), a government agency. The FHA insures these loans, which are made by private lenders (like Treadstone), to reduce the risk for the lender and make qualification for borrowers easier. As a result, FHA loans are often a good option for borrowers with less-than-perfect credit or a lower down payment. They also have more flexible underwriting requirements for lower credit scores or less than perfect credit compared to conventional mortgages.

On the other hand, conventional mortgages are mortgage loans that are not insured by the government. As a result, conventional mortgages may have stricter underwriting requirements and may require a higher credit score and a larger down payment than FHA loans. However, they may be cheaper in the long run, depending on your situation.

 

The key differences between FHA vs Conventional loans

So, what are the biggest differences between FHA and conventional mortgages? Here are a few key points to consider:

  • Down payment: FHA loans typically require a down payment of 3.5% of the purchase price of the home, while conventional mortgages may require a down payment of as little as 3%. This can make conventional loans a more affordable option for homebuyers who don’t have a lot of money saved for a down payment.
  • Interest rates: FHA loans may have slightly higher interest rates than conventional mortgages, but this can vary depending on the lender and the borrower’s credit profile. This is because the FHA insures the loan, which adds an additional layer of risk for the lender. However, even if the interest rate is slightly higher on an FHA loan, the overall cost of the loan may still be lower due to the lower down payment requirement.
  • Mortgage insurance: FHA loans require mortgage insurance for the life of the loan, which is an additional cost added to the monthly mortgage payment. This insurance protects the lender in case the borrower defaults on the loan. The cost of mortgage insurance can vary, but it is typically around 0.85% of the loan amount per year. Conventional mortgages may also require mortgage insurance, but it is typically only required if the borrower makes a down payment of less than 20%.
  • Credit score: FHA loans may be available to borrowers with credit scores as low as 580, while conventional mortgages may require a credit score of at least 620. This can make FHA loans a more accessible option for borrowers with less-than-perfect credit.

 

Which is cheaper, FHA or Conventional loans?

It’s difficult to say definitively which type of mortgage is “cheaper,” as the cost of a mortgage will depend on a variety of factors, including the loan amount, the interest rate, and the length of the loan term. However, there are a few general trends to consider when comparing the cost of FHA loans and conventional mortgages.

One key difference between the two types of loans is the down payment requirement. Up front, conventional loans have a small down payment requirement, starting as little as 3% of the home purchase price, while FHA loans typically require a down payment of 3.5%.

Additionally, FHA loans require mortgage insurance, which is an additional cost added to the monthly mortgage payment. This insurance protects the lender in case the borrower defaults on the loan. The cost of mortgage insurance can vary, but it is typically around 0.85% of the loan amount per year. Conventional mortgages may also require mortgage insurance, but it is only required if the borrower makes a down payment of less than 20%.

Another key difference is the interest rate. FHA loans may have slightly higher interest rates than conventional mortgages, but this can vary depending on the lender and the borrower’s credit profile. However, even if the interest rate is slightly higher on an FHA loan, the overall cost of the loan may vary based on other factors. There are no one-size fits all home loans! Your Loan Officer can strategize with you for the best option!

 

Does FHA or Conventional have better rates?

FHA loans may have slightly higher interest rates than conventional mortgages; this is because the FHA insures the loan, which adds an additional layer of risk for the lender. Additionally, mortgage interest rate trends are influenced by a variety of factors, including the overall economy and the direction of interest rates set by the Federal Reserve. Because of this, you shouldn’t wait for interest rates to change before you purchase a home.

The difference in interest rates between FHA loans and conventional mortgages can vary significantly, so it’s important to talk with a Loan Officer and determine your best course of action.

 

FHA vs Conventional Loans for first-time home buyers

The best type of mortgage for a first-time home buyer will depend on your financial situation, credit history, and the location or price of the property you are looking to purchase. There are a few general trends to consider when determining which type of mortgage might be the best option for a first-time buyer.

FHA loans are often a good option for first-time buyers because of their more flexible underwriting requirements—meaning FHA loans are more accessible to first-time home buyers with less-than-perfect credit or a higher debt-to-income ratio. FHA loans typically require a down payment of 3.5% of the purchase price of the home, which can be more manageable for first-time buyers who may not have a lot of money saved for a down payment.

On the other hand, conventional mortgages may be a good option for first-time buyers who have a higher credit score and a larger down payment. Conventional mortgages may have slightly stricter underwriting requirements than FHA loans, but they may also have lower interest rates and may not require mortgage insurance if the borrower makes a down payment of at least 20%.

 

The Final Answer

Overall, FHA loans can be a good option for borrowers who may not qualify for a conventional mortgage. However, they may have higher costs in the form of mortgage insurance and slightly higher interest rates. Conventional mortgages may have stricter eligibility requirements, but they may also have lower costs in the long run. It’s important to carefully compare the terms of both types of loans to determine which one is the best fit for your situation.

If you’re ready to start the home-buying process, get in touch! Our pre-approval is the first step to buying a new home. The best part? They’re free!