For the whole family, the time comes when they want to buy a home, but many wonder how to do it. Going to financing is the most logical, however, you should study the options well. There is the possibility of accessing an FHA loan or a conventional loan, here we indicate the characteristics, advantages, and disadvantages of each one so that you can take the best option.
What is an FHA Loan to buy a house?
FHA (Federal Housing Administration) loans are a form of acquiring mortgage loans in which the government acts as the lender’s insurance company. In this sense, if the beneficiary does not meet the creditor and the foreclosure money is not enough, the FHA compensates the lender for the losses caused.
The FHA loan was created in 1934 as an alternative to incentivize homeownership in communities. More than 80 years after its creation, it is still a good option for buying homes. The mortgage lender is more likely to agree to credit if your money is backed by the FHA.
What are the FHA loan requirements?
The requirements to access an FHA loan are very flexible, then we indicate what they are:
- Payment of a Mortgage Insurance Premium (MIP) in addition to the payment of your monthly payments. This payment varies depending on the loan and the initial payment.
- Downpayment of 3.5% and especially low amount compared to the conventional loan.
- Have a credit greater than 580 points since applicants are evaluated by their creditors based on their financial income and expenses.
- Demonstrate regular income for at least 2 consecutive years.
- The home you intend to buy must be approved and meet FHA requirements.
Is it a good idea to get an FHA Loan?
In financial matters, assessing risk comes first, and even though FHA insurance opens up more mortgage credit opportunities, some variables must be understood, such as it (MIP) and fixed-term payments. In any case, it seems to be a flexible modality, with few requirements for your application and a low risk of foreclosure.
What is a conventional loan to buy a house?
Conventional loans for home purchases are those in which the federal government does not intervene, that is, everything is managed through private companies. They have as main characteristic the absence of mortgage insurance, in cases they require at least 20% of downpayment for the purchase of the home.
For people who want a conventional loan but only collect 5 or 10% of the initial loan, they will have to take out private mortgage insurance, known as PMI. These private insurers are essential for credit approval, and concerning the MIPs of FHA loans, the cost of insurance is lower.
What are the conventional loan requirements?
Not being protected by the Federal Government, conventional loans are more demanding with applicants. This to protect your capital and reduce risk. To request a conventional loan it is necessary:
- Have a good credit score, higher than 640 points
- Have a constant and stable income
- Have verifiable income, among which “gifts” from relatives are allowed as part of the payment.
- You will need at least 5% for the downpayment or 20% of downpayment and will not get the private mortgage insurance (PMI).
Is it a good idea to get a conventional loan?
For the purchase of a home with a conventional loan, fluidity and financial support are recommended to keep paying interest over time. If the applicant has at least 20% of the downpayment, stable income, and a credit score higher than 640 points, it fits perfectly in the profile of conventional loans. It will always be convenient to evaluate concerning the requirements that are requested and those that are possessed.
FHA Loan vs. Conventional Loan: What’s better?
Before anticipating which one is better between the FHA loan and the conventional loan, it is important to do your profile study. Such as the amount available for the down payment, credit score, and financial stability. This will allow you to choose an option based on the requirements obtained and not on the strengths or weaknesses of both credit systems.
After the own study of the profile it is important to take into account:
- FHA vs. conventional loan provides clear advantages, especially if you have reduced money for the down payment.
- The Federal Housing Administration (FHA) has several mechanisms to help retain your home in the event of a foreclosure.
- The cost of PMI is less than MIP mortgage insurance, which you would have to pay for an FHA loan.
- The FHA program offers a lower down payment than the conventional loan.
Get ready to buy a new home in Miami!
When choosing a type of loan, decisions are based on possibilities that adjust to the real needs of each person. It is not about which type of loan is good or bad, it is about which one matches the profile of the borrower.
If you want to buy a new house in Miami and need advice on which type of mortgage loan fits your profile, I invite you to contact me to advise you on this important decision in the life of each person.