There are many different kinds of mortgage loans available in today’s market. How do you know which one is right for you? Your financial institution will have the most up-to-date rates and information regarding specifics for you, but if your dip into the home-buying pool has just started, here is some helpful information about the 2 most common types of mortgage loans: FHA and Conventional.
Conventional loans are issued by a bank or mortgage lender (usually a bank) and your interest rate (variable) is dependent upon your credit score and history. Your income and banking history are also taken into account for your pre-approval amount and ultimately what you will be allowed to borrow. Your interest rate can range anywhere from 3.49% to 3.62 for a 30 year fixed (not variable) mortgage. The less time it takes you to pay it off, the higher interest rate is usually going to be. a conventional 15 year mortgage can range anywhere from 3.87% to 4.12%. Down payment for Conventional loans usually doesn’t falter far from 10%. You will need to verify income with pay stubs as well as bank statements. Pay stubs usually go back about 6 months, bank statements around 2 years. They want to be sure you’ve got a good history with your bank account(s), and rightfully so as only .36% of mortgages went into foreclosure last year. Most banks offer some sort of payment deferment if you do run into financial trouble, they don’t want to foreclose on you! They want to help! If your credit is above 640 and you’ve got a good employment and bank history, you should try for a Conventional mortgage, as even a 1% difference in a mortgage rate means about $30,000 over the course of a 30 year loan.
FHA loans are backed by the Federal Housing Administration and are actually still issued as mortgages from a financial institution, but they’re guaranteed through the FHA. That means if you default on the loan, the FHA will step in and pay the bank on your behalf. You may still be foreclosed on, but the bank will be protected. And the foreclosure procedures are much more lenient than with a Conventional mortgage, which basically means they will do anything and everything they can to get you back on track to avoid a foreclosure. FHA loans also require a lower credit score and potentially a lower down payment. If your credit score is between 500-579, you will still be required to have 10% down, but a credit score of 580 and above qualifies you for only 3.5% down! Although you may get a break on a down payment, FHA loans are always fixed and the rate is almost always higher than that of a Conventional loan. Rates as of today on a 30 year mortgage are 4.969%, but for a 15 year mortgage, they are 3.997%. If you’re in a position to afford a 15 year over a 30 year mortgage, it will ultimately save you tens of thousands of dollars. FHA loans also require much more strict inspection requirements, although you will have the chance to fix them (or have the seller fix them!) but EVERYTHING must be up to code by closing date, no exceptions. If you’re interested in the requirements, this article can explain further.
Bottom Line: If your credit score allows, try for a Conventional loan. If not, FHA is there for borrowers who need it! Either way, buying a home is the quintessential adult thing to do and it’s closer than you think.