Are you ready to become a homeowner, but wondering what type of mortgage you should get to help you finance your property? You may qualify for different types of loans based on your financial profile, and while many types of loans are conventional, there are other options available that are backed by the Federal Housing Administration, (FHA). Although both types of mortgages help a borrower finance the purchase of a home, there are many key differences between these loan types. If you are interested in buying a home in Knoxville, Maryville, Lenoir City, Oak Ridge, or Gatlinburg, Tennessee, and have questions about your home financing options, Foundation Mortgage is here to help. Read on to learn more about the differences between conventional and FHA loans.
FHA loans make it easier for borrowers with low to moderate income and lower credit become eligible for a home loan. FHA loans are insured by the federal government and issued by FHA approved lenders like credit unions, banks, and other lending companies. Since they are federally insured, lenders are financially protected if a borrower is unable to pay back the loan, so lenders are able to offer lower interest rates and more favorable terms, making it easier for borrowers to qualify for an FHA loan than a conventional loan. FHA loans can be used to buy or refinance single and multi-family homes, condominiums, and some types of manufactured homes and have down payments as low as 3.5%. Typical requirements for FHA loans include:
- A credit score as low as 580
- The residence must be the borrower’s primary residence
- A borrower must provide verification of consistent income and employment
- A debt-to-income ratio of 43% or less
- Mortgage insurance premiums, (MIP) required
Conventional loans are not insured by the government and are serviced by private mortgage lenders. Because the federal government does not insure lenders in the event that a borrower defaults, conventional loans pose a higher risk than FHA loans. Therefore, the eligibility requirements for these types of loans are stricter and are offered to borrowers that have stronger financial circumstances. Interest rates for conventional rates depend on the amount of down payment you make, which can range anywhere from 3% to 40%. The common eligibility requirements for a conventional loan include:
- A credit score of 620 or higher
- A minimum of 3% down, (if you are able to put 20% down, private mortgage insurance will not be required)
- A debt-to-income ratio of 45% or less
- A home appraisal will be required to determine the value of the property
If you are located in Knoxville, Maryville, Lenoir City, Oak Ridge, or Gatlinburg, Tennessee, Foundation Mortgage can help you determine the best financing solution for your situation, contact us today for a consultation.