Conventional Mortgage
A conventional mortgage is a mortgage that is NOT backed by any government entity. This is to say that the mortgage is not backed by FHA, VA, or USDA Rural Housing Services or any other government institution. With a conventional mortgage, lenders are free to set loan requirements as they see fit.
However, many lenders would like to sell their loans in the future. This replenishes their cash in order to make new loans. Thus, lenders who would like to sell their loans to government sponsored enterprises like Fannie Mae or Freddie Mac. However, these loans being sold must meet certain requirements set by these institutions. These types of loans are known at conforming loans.
Conventional Mortgage Interest Rates
Conventional mortgage rates tend to be slightly higher than those offered by government-backed mortgages.
The interest rates carried by a conventional mortgage depends on several factors, which include the length, the size, and whether it's a fixed or adjustable rate. Mortgage lenders set interest rates based on their expectations for future inflation. Their expectations may differ from government-sponsored lenders.
Often times, the interest rate charged is linked to points. These are fees paid to the lender in order to obtain the loan. The more points you pay the lower your interest rate will be. One point is equal to 1% of the loan amount. People who are planning on living in their home for more than ten years should consider buying down the interest rate via points..
Conventional mortgages may also carry insurance. This is typically done when the borrower hasn't put sufficient money down. Thus the lender sees this as a riskier loan. The borrower is required to purchase private mortgage insurance. This is a premium paid that benefits the lender. This is paid every month until you reach a loan to value ratio of 80%.
FHA
The first thing to know about FHA is the name. It stands for Federal Housing Administration. They operate under the larger U.S. Department of Housing and Urban Development. So what exactly does the FHA do? Their function is not to be a direct lender. Their function is to INSURE lenders against borrower default
Lenders who approve FHA loans can rest assured that if the borrower defaults they will receive their money. This wouldn't be the case in a conventional mortgage. Unlike FHA, a conventional mortgage lender would have to sell the house in order to recover their money. So what exactly does the FHA do? Their function is not to be a direct lender. Their function is to INSURE lenders against borrower default.
However, there is a kicker. The kicker is that the borrower must pay mortgage insurance to the FHA. This can usually be a couple hundred dollars a month. Also, at the time of this writing, the payments for the mortgage insurance DOESN'T go away. You're stuck with it until you either sell or refinance under conventional terms.
The benefits of having an FHA loan are that they make it easier to qualify. Unlike a conventional loan, FHA loans typically require less money down, lower credit scores, and lower amounts of income. This is great news. Under FHA loans, people who would otherwise be denied a home loan can now obtain a loan.
The benefits of having an FHA loan are that they make it easier to qualify. Unlike a conventional loan, FHA loans typically require less money down, lower credit scores, and lower amounts of income. This is great news. Under FHA loans, people who would otherwise be denied a home loan can now obtain a loan.
Who are FHA loans for
FHA loans are offered to low-income individuals who have credit scores as low as 500. Individuals with a credit score between 500-579 can obtain an FHA loan with a down payment of 10%; individuals with a credit score higher than 580 can get an FHA loan with as little as 3.5% down. The Federal Housing Administration does not lend the borrower the money to take on a mortgage or to buy the house. Rather, the borrower pays a monthly or annual mortgage insurance premium to the FHA to insure the loan, which the lending institution issues to him or her. In case of default, the lender’s financial risk is minimized because the FHA would step in to cover the payments.These loan limits and criteria are always changing. Thus, check with current loan requirements before moving forward.
Closing Remarks
The need to finance a home purchase can be difficult. There can be many costs upfront and on the backend. Inform yourself with what will work best for you.
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