Banking, Debt, Home Ownership

The Road to Home Ownership: FHA vs. Conventional Mortgage

For many people, home ownership is the pinnacle of adulthood. Finally, you’re able to afford a house for yourself and your family! You have your dream home in mind, and you’re ready to take the plunge. First, however, you have to decide on the type of mortgage that’s right for you. Deciding  between a conventional mortgage and an FHA loan can be a headache, but understanding the two can help you make the best choice for your family.

FHA Loans

An FHA loan is a loan backed by the Federal Housing Administration. Under an FHA loan, you will receive:

  • Less stringent qualifications, since the mortgage lender will experience less significant losses if you’re unable to pay the amount of the loan
  • Lower down payment requirements
  • Better interest rates over the course of the loan

This type of loan is intended to help first-time home buyers and others who have less than stellar credit acquire the homes they need. It provides security to both lender and borrower–but at a cost. Individuals who have FHA loans must take out mortgage insurance, including both an up-front premium and monthly payments throughout the lifetime of the loan.

Conventional Mortgages

Conventional mortgages are the standard mortgage typically acquired by home buyers. They have:

  • Fairly stringent requirements regarding credit scores
  • Increased down payment requirements
  • Reasonable and expected interest rates throughout the life of a loan

Conventional mortgages are the option chosen by most home buyers with reasonable credit and the expectation that they’ll be able to pay their loan fairly easily. Most people, when setting out to purchase a home, choose a conventional mortgage without looking back.

FHA vs. Conventional Mortgage: A Cost Comparison

An FHA loan looks great up front. Lower interest rates? Where do you sign? Unfortunately, those interest rates don’t always add up to cost savings over the life of the loan. Assume that you’re purchasing a home valued at approximately $150,000. You have 10%–$15,000–to put down on the purchase price of the home. Over the thirty-year lifetime of a standard mortgage, paying approximately $725 per month, you’ll end up paying $261,000 for your home by the time it’s paid for. With a conventional loan, using the same 10% down payment, you’ll pay approximately $625 per month for thirty years–a total of $225,000. That’s a substantial savings over the life of your loan! Manage to scrape up a 20% down payment before you take out a conventional mortgage, and you’ll lower your monthly payment to $555, making the total cost of your loan just $200,000.

 open house sign

The Loan That’s Right for You

For most families, a conventional mortgage is the way to go. If you’re able to save up a substantial down payment–around 20% is generally recommended, though you may be able to get a conventional mortgage with a down payment of as little as 5%–and haven’t filed for bankruptcy within the last seven years, as long as you have a reasonable credit score, a conventional mortgage is likely the right choice. On the other hand, if your credit is poor or you’ve had to file for bankruptcy between three and seven years ago, an FHA loan is a great way to purchase the home you’ve dreamed.

Choosing between a conventional loan and an FHA loan isn’t always easy. If you need additional advice, working with a qualified financial planner is a great way to ensure that you’re prepared for all of the financial challenges that come along with home ownership. By preparing appropriately and doing the calculations to ensure that you’re prepared for both the payments you’ll have to make each month and the final cost of your home by the time the loan is paid, you’ll avoid any unpleasant surprises down the road and make it easier for you to choose the home ownership solution that’s right for you.

 

Need to know how much home you can afford?  Use this mortgage calculator to see how much your monthly payment will be. (Click Here For Calculator)

 

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