There are many different loan programs available for first-time-homebuyers (or homebuyers in general), but the two most popular that I want to talk about today are the FHA loan and the conventional loan.
Let’s start with the FHA loan. This loan allows you to purchase a property with a down payment of just 3.5%. That’s equivalent to paying $3,500 for every $100,000 the home is worth. A $400,000 property, for example, would only require a down payment of $14,000. That’s an awesome deal! The FHA loan is also a government-secured loan, but the best thing about it is you can qualify for it with a FICO score as low as 580.
The FHA loan does have its drawbacks, however. Since you’re not putting at least 20% down for it, you have to pay mortgage insurance. At the end of the day, though, the important thing is it allows you to buy a home without a large down payment.
The conventional loan is the second-most popular among first-time homebuyers. People with high credit scores and a higher income make up the majority of those who qualify for a conventional loan. Unlike FHA loans, conventional loans are credit-driven. This means the higher your credit score is when applying for it, the lower your interest rate will be. Additionally, conventional loans aren’t as lenient as FHA loans when it comes to a person’s debt-to-income ratio. If you have an excellent credit score and you make good money, this might be a better option for you.
A conventional loan allows a down payment as low as 3%, but as with an FHA loan, you’ll still be stuck having to pay mortgage insurance. The main difference between these two scenarios is that with an FHA loan, you have to pay that mortgage insurance until you refinance your loan. With a conventional loan, once your property appreciates to a 70% loan-to-value ratio, you can do a drive-by appraisal or simply contact your mortgage insurance company and have your mortgage insurance removed.
An FHA loan is a better option if your resources are limited or you have a low credit score, but it’s not designed for you to keep it over a period of 30 years—it’s designed to get you into a house. Once that property appreciates, the smart move would be to refinance out of the FHA loan and into a conventional loan so you can get rid of your mortgage insurance and have a lower payment.
Remember, these loans aren’t one-size-fits-all. If you have any more questions about which one is best for you, give us a call so we can determine where you stand and what you need to do to qualify for either.
As always, if you have any other mortgage questions, don’t hesitate to reach out. I’d be happy to help you.