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Finance

Take the steps necessary to get a letter from the lender stating you are "pre-approved" for a loan in a specific price range. It's important to have this letter before you make a contract offer to buy real estate. Once you're pre-approved, you know what price range of homes you should be looking at.

Confused on which type of loan?

Similarities between Conventional & FHA loans

 Both loans currently offer some of the lowest rates in history. 15-year conventional fixed-rate mortgage rates are at an all-time record low. FHA rates are slightly higher but in general, rates are competitive and comparable.

  • The most popular FHA & conventional loans are fixed-rate mortgages. That means the interest rates won’t change for the life of your loan.
  • However, both conventional & FHA offer ARMs (adjustable rate mortgages).  

Advantages of an FHA Loan over a Conventional Loan

 Credit qualifying criteria not as strict – Credit scores as low as 620 now qualify for an FHA loan. Additionally, your allowable debt-to-income ratio is higher on an FHA. Meaning, if the amount of debt you carry is relatively high compared to your income you may still qualify for an FHA loan.

  • Low down payment required – FHA loans generally require as little as 3.5% down on the purchase of a home. Government requirements also feature some of the lowest amounts needed to close a loan, potentially leaving more money in your pocket at closing.
  • Easy Refinancing – Refinance up to 97.75% of your home’s value. FHA also offers an FHA Streamline which allows you refinance with no appraisal and minimal credit requirements.  

Benefits of a Conventional Loan vs an FHA Loan

 Most competitive mortgage rates – Due to the FHA approving loans for borrowers with lower credit, there is a greater risk associated with those types of loans, meaning the rates are generally slightly higher. Good credit requirements for conventional loans offer borrowers lower rates when compared to FHA loans.

  • No MIP at closing – FHA loans come with mortgage insurance premiums (MIP) that are built in over the course of the loan. When you close, there’s also a one-time upfront mortgage insurance premium due – currently 2.25% of the total loan amount. Conventional loans do not require this upfront premium.
  • Flexible terms – Conventional loans offer several repayment period terms. Different repayment terms offer different, more competitive mortgage rates. The faster your term, the lower your rate. Choose between 10-, 15-, 20-, 25- or 30-year repayment periods. FHA loans generally do not offer as many options.

If you have less than perfect credit and don’t have enough for the standard 5-20% down payment, an FHA loan may be the better option for you. If you have good credit, a stable job and a sizable down payment – you could save more money over the life of your loan by going with a conventional option. If you need more help figuring out which option best suits you, you can always reach out to a Home Loan Expert or your financial advisor. But be sure to act quickly as these low mortgage rates are not going to last forever.

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Adjustable - An Adjustable Rate Mortgage, or ARM, is a type of mortgage in which the interest rate is adjusted up or down, in accordance with current interest rate levels. The interest rates are tied to an economic index outside of your banks control, such as the Treasury bill rate. Your monthly principal and interest payment will fluctuate with these rate changes. Initially payments will be less than with a fixed mortgage, making this type of mortgage attractive to short-term buyers. Note: Inquire on the "cap", or maximum interest level your mortgage can reach, since it is possible for rates to raise significantly during the term of your mortgage.

Fixed - A fixed rate mortgage, on the other hand, uses both a fixed term (length of time) and fixed interest rate. At the start of the mortgage the rate and term are determined, and as a result the monthly amount for principal and interest payments remain constant for the duration of the mortgage. Fixed rate loans are more attractive to home buyers who plan on spending a long time in their home, or expect no major change in income.

Assumable - Sometimes homebuyers can find a loan which is "assumable." With an assumable loan, the current sellers lender is willing to transfer the existing loan to you, either at the previous interest rate or the current interest rate. Assumable loans are attractive to buyers because they usually require less paper work and less time.






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