Conventional vs. FHA mortgages

Are you ready to apply for a mortgage on your first home, but don’t know which mortgage works best for you? Should you go conventional, or would FHA loans be better suited for your financial lifestyle?

Before you decide, consider conventional and FHA loan advantages and what qualifications are required.

What are conventional mortgage loans?

People with established credit and low levels of debt usually qualify for conventional mortgages. These loans are generally offered by private mortgage lenders like Adirondack Bank. Unlike FHA loans, conventional mortgages are not backed or secured by the government.

Some advantages of conventional loans include:

• More property types: Conventional loans can be used for a second home or an investment property.
• No program-specific fees: You will likely pay fees; however, conventional loans don’t require additional program-specific fees like government-backed loans.
• More choices in loan terms: The most common conventional mortgage is 30 years. With a fixed rate mortgage, your rate is locked in for the term of the loan. Other terms include 10, 15, and 20 years.

The down payment requirement may be 20 percent or more. You may be able to go as low as 3 percent down; however, you will have to pay private mortgage insurance (PMI). With the PMI, you only pay a monthly or single premium, with little to no initial payment required at closing. After your principal loan balance drops to 78 percent of the home’s value, the PMI will no longer be required.

What are FHA mortgage loans?

FHA loans make homeownership possible and easier for low- to moderate-income borrowers who may not otherwise be able to get financing because of a lack of or a poor credit history, or because they have limited savings. Those who qualify for an FHA loan require a lower down payment. And the credit requirements aren’t nearly as strict as other mortgage loans.

According to the Consumer Financial Protection Bureau (CFPB), the government agency Federal Housing Administration regulates and insures FHA loans. Because FHA loans are federally insured, lenders can offer more favorable terms, including lower interest rates, to borrowers who might not otherwise qualify for a home loan. This means it’s also easier to qualify for an FHA loan than for a conventional loan.

For FHA mortgage loans, they:

• Allow for down payments as low as 3.5 percent.
• Allow lower credit scores than most conventional loans.
• Have a maximum loan amount that varies by county. You can check the loan limit on the Department of Housing and Urban Development (HUD) website.

FHA loans may be more expensive than conventional loans for borrowers with good credit and that have a 10 to 15 percent down payment. It may be the cheaper option for borrowers with lower credit scores or a smaller down payment. The loans are fixed-rate with either 15 or 30-year terms.

If you are unable to afford the 20 percent down payment, you’ll have to pay for FHA mortgage insurance for the life of the loan. According to the CFPB, you will pay a monthly mortgage insurance premium with your monthly payment and an upfront mortgage insurance fee with your closing costs. If you don’t have enough funds to pay the upfront fee out of pocket, you are allowed to roll the fee into your mortgage. The CFPB says your loan amount and overall loan cost will increase if you roll it into your monthly mortgage payments.

Found your dream home?

Adirondack Bank is here for you when you are ready to buy your home. We provide expert advice from the beginning of your home financing journey to the end. Whether it’s your first home or a refinance, we have the product to suit your needs. Let our team of mortgage loan originators help you choose the mortgage product that’s right for you.

The information in this article was obtained from various sources not associated with Adirondack Bank. While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. Adirondack Bank is not responsible for, and does not endorse or approve, either implicitly or explicitly, the information provided or the content of any third-party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. Adirondack Bank makes no guarantees of results from use of this information.