Many first-time homebuyers and even homebuyers that are purchasing their second are not familiar with the different loan options and their differences. Here’s a cheat sheet for you showing the differences between Conventional Loans, FHA loans and VA loans.
What is a Conventional Loan?
This is a loan that is not guaranteed or insured by the federal government. Since it’s not insured/guaranteed there are no guarantees for the lender in the event that you go into default, or fail to repay the loan.
These loans are available to all, but are more difficult to qualify for compared to FHA/VA loans. (Credit and income requirements are stricter).
How much down payment is required if I use a Conventional Loan?
At least 20% down payment is needed if you do not want to pay private mortgage insurance (PMI)
You can put down less than 20%, however PMI would then be required. PMI provides more assurance for the lender if you were to default. (If you default on the loan, the mortgage insurance company makes sure the lender is paid in full).
What is needed to qualify for a Conventional Loan?
Typically if you have good credit, steady income and can afford the down payment, you have a good chance of qualifying for a conventional loan.
What are the benefits?
Unlike FHA loans, there isn’t a maximum loan amount for Conventional Loans.
Available for all (not limited to certain groups, like the VA loan which is only applicable for veterans)
What is an FHA loan?
A FHA loan is similar to a conventional loan (in regards to it providing financing for you to purchase a house) however one of the key differences is that the federal government insures FHA loans. This means that if you fail to make your payments and default on your loan the Federal Housing Administration (FHA) will repay the bank/lender.
FHA loans are easier to qualify for than conventional mortgage loans, and are also available for anyone to apply. The credit and income requirements are not as strict (because the federal government insures the loan, so it’s less risky for lenders). Because of this, the required down payment is much lower than when using conventional loans.
How much down payment is required if I use a FHA Loan?
FHA down payments can be as low as 3.5% of the purchase price of the house. (So if you were buying a house that’s $200,000, you’d need $7,000 for the down payment).
What is needed to qualify for a FHA Loan?
Although the credit and income requirements are less strict, FHA does have a maximum loan limit. The max limit varies depending on what the average cost of housing is in your region. In the DFW area, the 2015 FHA max is $310,500 for a single family home.
Mortgage Insurance Premium (MIP) is also required as part of the FHA loan. This is the premium that borrowers pay that helps contribute to the Mutual Mortgage Insurance Fund. FHA uses the Mutual Mortgage Insurance Fund to pay lenders’ when borrowers default. (This is like the PMI that’s required for Conventional Loans.)
What are the benefits?
Low down payment (as low as 3.5%)
The financing of some closing costs
Low closing costs
What is a VA loan?
This is a mortgage loan that can only be obtained by certain borrowers and the financing must come from VA-approved lenders.
VA loans are guaranteed by the government (by the Veterans Administration). Since the loan is guaranteed, the lender is protected against loss if you (the borrower) fail to repay the loan.
How much down payment is required if I use a VA loan?
You can get a VA loan with no money down. No this isn’t a typo – there’s seriously zero money down
What is needed to qualify for a VA loan?
You must meet the criteria.
To get a VA loan, you must be:
a current member of the U.S. armed forces
a reservist/national guard member, or
an eligible surviving spouse. (For more info go to www.benefits.va.govand click on “Home Loans,” then “Home Loans Home,” and “Eligibility.” Then click on "Learn more" under "Purchase Loans and Cash-Out Refinance.")
What are the benefits?
Can get a loan and pay no down payment
Unlike FHA and Conventional Loans, insurance premiums aren’t required (MIP/PMI)
If you’re a veteran and meet the eligibility requirements, this is the loan for you
Want to learn more? Contact Amber at Amber@amberjproperties.com and I can connect you with a lender to answer your lending questions.
Sources: US Department of Veterans Affairs (www.benefits.va.gov), www.fha.com, www.nolo.com
Author:Amber L Johnson Phone: 972-755-9255 Dated: August 24th 2015 Views: 2,914 About Amber: Amber Johnson was born and raised in North Carolina, where she attended Wake Forest University and a...