What is a better loan? Conventional or FHA?
As a mortgage loan originator, like all originators, I get asked many questions. Two of the most common are: What will my interest rate be? and What is the difference between a conventional and an FHA loan? Today I am going to tackle the second question. As they actually also go hand in hand.
I have many clients come in convinced they have to do a conventional loan. They talk about all of the negatives of an FHA loan. The truth is, both are issued by banks and approved lenders. Both provide you will the necessary goal, to obtain a home loan. However, they are both a little different. Here is a quick glance at some of the differences.
FHA
An FHA loan is a government-backed loan. It is insured by the Federal Housing Administration. This is seen as a “safer” loan for the bank and lender. For this reason, your credit score can be a little lower than a conventional loan. This loan also offers a smaller down payment typically. On the downside, you have a Mortgage Insurance Premium (MIP). FHA draws from this to pay lender claims when borrower’s default on a loan. Your interest rate on an FHA is typically going to be lower than a conventional loan, again depending on the situation and position you are in.
Conventional
A conventional loan is not insured or guaranteed by the federal government. So for the lender, unlike the FHA loan, a conventional loan doesn’t guarantee the lender money if you fail to pay the loan back. So in order to guarantee some money, if you don’t put down a 20% down payment or have 20% equity in the home, you will have PMI. This stands for Private Mortgage Insurance. For a conventional loan, you also need to have pretty good credit.
As you can see, you have two different loans, however both achieve the goal of buying your dream home. It is great if you come in having a loan in mind, but I am here to educate you on which is a better fit for you and your financial situation.
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Laura Mendele
Envoy Mortgage
Mortgage Loan Originator
NMLS# 1451908
Branch License #6666
O: (763) 350-6507
7760 France Avenue South
Suite 1100, Office 1149A, 1150A, 1158
Edina, MN 55435