The question of which is better, an FHA and a traditional loan has been there for decades and still holds its grain today. The answer to this question depends typically on the situation of the borrowers in terms of credit, assets, and income when purchasing a home. Below are some factors from Colorado Mortgage Pros that determine which is better:
Credit requirement is more lenient on the FHA loans. Several lenders will give a loan to borrowers with a credit of 600 middle FICO score. It is quite hard to find a lender who will offer the same for the conventional loans. However, if you find one, the borrower will be required to bring more money to put down.
The interest rate for both loans can either be adjustable or fixed. Basically, for the conventional loan, the interest rate is higher compared to the FHA loan. The reason for this difference is that the conventional conforming loans are given through private enterprise or lenders while in the FHA; the federal government insures the loan.
Mortgage insurance is a significant issue if borrowers are not raising the 20% down payment on the lower credit score borrowers. In conventional conforming loans, Private Mortgage Insurance will be required. Companies offering PMI will need the borrowers to have higher credit middle score. This makes it very hard to receive mortgage insurance on conventional conforming loans with this type of borrower. On the FHA loans, these criteria in qualifying borrowers are not needed. The Mortgage Insurance Premium, MIP on FHA is paid up front included in the monthly payment and loan amount but will be more expensive in the long run. The FHA does not require credit card qualification, and the mortgage insurance premium cannot be canceled irrespective of the loan-to-value. The only way the mortgage insurance on the FHA loan can be revoked is by refinancing it to another loan type such as the conventional one.
The contribution of the seller towards the closing costs of the borrower is another crucial difference between the two types of loans. FHA allows up to 6% of the sales price. This means that the seller will contribute up to 6% towards the closing costs of the borrower. Conventional loans allow only 3% of the borrower, and hence the FHA loan type goes to closing, bringing less money to the table.
Down payment requirement
With the FHA loan type, you will only be required to provide a down payment of 3.5%. The total down payment can be a gift from an immediate member of your family. With the conventional loans, you will be required a minimum of 5% down payment. The whole amount can also be gifted if the total down payment of the loan is at least 20% or more.
Most lenders prefer offering conventional loans to borrowers over FHA loans. The main reason for this is that conventional conforming loans are easier to process. With all factors kept constant, it is simple to qualify for FHA loans compared to a conventional loan. The credit requirement for an FHA loan is much lenient compared to conventional loans. Down payment requirement is lower for the FHA loans being 3.5%, and the seller concession of up to 6% is allowed. For these reasons, FHA is quite popular among home buyers. For more information on the differences and the ideal option, you can always contact our home loan specialists at Colorado Mortgage Pros.