Comparing Conventional Loans vs FHA Loans: Which is Right for You?

When people are looking to get a mortgage, they often consider different types of mortgages by speaking to their respective mortgage brokers in order to find the one that best suits their needs. There are many factors to consider when looking for a mortgage. Interest rates, repayment terms, and mortgage insurance are just a few of the things that can vary from one mortgage to the next. It's important to compare different options before settling on a mortgage so that you can find the one that best suits your needs.

An individual who is in contact with a mortgage company will tell you that choosing the right mortgage can be hard since there are many options available. However, two of the most popular options are conventional loans and FHA loans. Both of these options have their own set of benefits and drawbacks, so it's important to compare them side by side before making a decision. Which of these two loans is best for you as a person looking for the ideal mortgage, then? We'll discuss both mortgage options in detail and assess them thoroughly.

What are conventional loans?

A conventional loan mortgage is a type of home loan that is not backed by the government. These loans are not insured by the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA), and they typically have higher interest rates than government-backed loans. Conventional loans are available from banks, credit unions, and online lenders.

Since a conventional loan is one that is not guaranteed by the government, the lender will suffer losses if the borrower defaults on the loan.

Conventional loans can be divided into 2 further categories: conforming and non-conforming.

1. Conforming Conventional Loan:

A conforming loan is a loan that meets the guidelines set by Fannie Mae and Freddie Mac. These are two government-sponsored enterprises that purchase loans from lenders and package them into securities. Conforming loans must meet certain standards, such as having a down payment of at least 5 percent and a maximum loan-to-value ratio of 80 percent.

2. Non-Conforming Conventional Loans:

Non-conforming loans are loans that do not meet the guidelines set by Fannie Mae and Freddie Mac. These loans may have a down payment of less than 5 percent or a higher loan-to-value ratio. They may also have a different interest rate or term than a conforming loan.

While the maximum loan an individual can get through conventional means is subject to the conforming loan limit set by the Federal Housing Finance Agency, mortgages that exceed this threshold are known as "jumbo loans." For the year 2022, that limit has been set at $647,200 for most of the United States.

The pros of going with a conventional loan:

Here are six of the biggest pros of going with a conventional loan for your mortgage.

1. Lower interest rates: Interest rates for conventional loans are typically lower than for other loan types, which can save people a significant amount of money over the life of their loan.
2. More borrowing options: Conventional loans offer a variety of borrowing options, including fixed-rate, adjustable-rate, and interest-only loans, so mortgage seekers can choose the loan that best suits their needs.
3. Greater flexibility: Conventional loans offer greater flexibility than other loan types when it comes to things like repayment terms, pre-period closure, closing costs, etc.
4. Non-purchasing spouse: If an individual is married, one of the biggest benefits of a conventional loan is that it allows them to include their non-purchasing spouse on the loan. This helps them qualify for a larger loan amount and a lower interest rate.
5. Potentially lower interest rates: A conventional loan also offers the possibility of a lower interest rate for borrowers with excellent credit. This is because lenders see conventional loans as less of a risk.
6. Possible lower downpayment:  One will need to have at least a 3% down payment for a conventional loan. This is lower than other types of loans, which can make it a good option.

What are FHA loans?

As mentioned earlier, one of the most common types of mortgages in the United States is FHA loans, which are backed or insured by the Federal Housing Administration. If someone defaults on the loan, the FHA will pay the lender back a portion of the loss. In order to qualify for an FHA loan, one must have a credit score of at least 580 and a down payment of at least 3.5 percent.

In terms of loan ceilings, the FHA's maximum loan amount in 2022 is $420,680 in low-cost areas and $970,800 in high-cost markets.

The Federal Housing Administration (FHA) loan is a popular choice for many borrowers because it has a lower down payment requirement than other loan programs. Additionally, buyers are not required to pay for private mortgage insurance (PMI) with an FHA loan, which can further lower monthly loan payments.

The Pros of Going with an FHA Loan:

Here are six other advantages of FHA loans:

● A lower credit score is required to be approved for an FHA loan than it is for a conventional loan.

● FHA loans have more flexible underwriting guidelines than conventional loans.

● One can use an FHA loan to purchase a home in a number of different types of housing, including single-family homes, condominiums, and even some manufactured homes.

● Both first-time homebuyers and existing homeowners can apply for FHA loans.

● FHA loans usually have a lower down payment requirement than conventional mortgages.

● There are fewer closing fees associated with FHA loans.

Comparison of the two loan types

There are several key differences between conventional loans and FHA loans. The most notable difference is that conventional loans are not backed by the government, while FHA loans are. This means that if you default on an FHA loan, the government will pay back the lender, but if you default on a conventional loan, the lender is not protected from losses.

Another significant distinction is that whereas a conventional loan requires a credit score of at least 620, an FHA loan can be obtained with as little as a 580 credit score. Furthermore, the down payment for an FHA loan is as low as 3.5 percent, while a conventional loan usually requires a 5 percent deposit.

Another factor is property appraisal. The condition of the property and its intended use are important factors in the appraisal. FHA appraisals are tougher than conventional appraisals, as they not only assess the value of the property but also thoroughly measure it for safety, soundness of construction, and compliance with local code restrictions.

An FHA loan requires that the property be used as the borrower's primary residence. Investment properties and homes that are being flipped (sold within 90 days of a prior sale) are not eligible for FHA loans.

However, conventional loans offer better benefits as they may be used to purchase a primary residence, a vacation home, or an investment property.

So, which loan is right for you?

If you're trying to decide between a conventional loan and an FHA loan, the answer to this question depends on your specific situation. If you have good credit and can put down a larger down payment, then a conventional loan may be the better option for you. However, if you have less-than-perfect credit or can only put down a small down payment, then an FHA loan may be the better option. Ultimately, it’s up to you to decide which type of loan is right for your needs.

Choosing the right mortgage broker or being in contact with an experienced mortgage company can help anyone with confusion about the right mortgage plan. Therefore, we recommend you go with PierPoint Mortgage, which is a trustworthy mortgage broker company in the USA and has a proven track record of helping people with appropriate mortgage options.