Mortgages 101: A Look at Loan Programs

mortgage_houseMortgages can be complicated and there are many differences between conventional and Federal Housing Administration (FHA) mortgage loan programs.

When considering the purchase of a home, it’s important that you compare the two.

FHA Mortgages

If you’re looking to purchase a home using FHA, you must put down a minimum of 3.5% and you need a credit score of 620 or higher.

Regardless of the loan-to-value ratio, you’ll also pay an up-front mortgage insurance (MI) premium of 1.75% of the financed loan amount and normally there is a monthly mortgage insurance premium after that.

Income guidelines are more conservative with FHA than with conventional programs.

FHA is more liberal with credit, so it may be a better choice if you’ve had recent credit issues but make more than enough income to cover all your monthly expenses.

Conventional Mortgages

Homebuyers using conventional financing must put down at least 5% and have a minimum credit score of 720.

There is no up-front MI on conventional loans.

However, there is monthly MI on all loans where the loan-to-value ratio is greater than 80%.

Conventional financing will accommodate borrowers with credit scores as low as 620.

However, the premiums that are charged in such things as up-front fees or rate increases will usually make FHA loans a better choice for borrowers with credit scores in this lower range.

Conventional financing requires two months of liquid asset reserves.

This means you must be able to cover two months of the mortgage, including taxes and property insurance, from sources such as checking or savings accounts or a retirement account. FHA has no reserve requirements.

Leave a Reply

Your email address will not be published. Required fields are marked *