Are you a first time home buyer? Thinking about it, just a
little? First, we’re excited for you because it is quite an experience both
buying and owning your very own home but at the same time it can get a little
confusing. Especially so when it comes time to shop for a home loan. There are
so many different terms, many of which you’ve never even heard of before, that
a lot of it can just go over your head. Your loan officer will always be there
to walk you through the process but if you haven’t gotten that far yet let’s
take a moment to separate two mortgage programs- FHA loans and conventional
FHA loans, mortgage programs underwritten to standards
issued by the Federal Housing Administration, carry a government guarantee to
the mortgage company which compensates the lender should a loan ever go into
default. This guarantee is financed by two separate mortgage insurance
premiums. An upfront mortgage insurance premium is a one-time charge that is
rolled into your loan amount. A second premium is an annual one paid out in
monthly installments throughout the life of the loan. FHA doesn’t process or
approve your loan, a mortgage lender does that, but does provide the guarantee
to the lender.
A conventional loan carries no such guarantee to the lender
and is not government-backed. The individual lender assumes the risk when
approving a mortgage loan. Should a loan ever go into default the lender will
be forced to foreclose on the property. All that said, which is better?
FHA loans are popular with first time buyers due to the low
down payment requirement of 3.5% of the sales price. Conventional loans can
require a down payment of at least 5.0% and one conventional loan program asks
for a 3.0% down payment as a minimum. Yet with conventional loans with less
than a 20% down payment there is a monthly mortgage insurance premium payment,
much like FHA loans have.
Both programs will have competitive mortgage rates and
monthly payments but if you’re seeking a loan that requires as little down as
possible, either choice can work for you. However, if you do have a down
payment approaching 20% or more, a conventional loan might be the better choice
due to lack of any upfront or annual mortgage insurance premium.
For more information or questions about mortgage loans, please call (855) 757-8748.