At Ryan DiCharry, we love helping families achieve their home owning dreams. Part of making this process smooth and successful is having the knowledge needed to navigate the world of loans and realty. For most, obtaining a loan is essential to the home buying process. When you first set out to secure one, you may be shocked at just how many loan types and lending programs there are. Everyone’s circumstances will be different, but for most, the two main loans you should consider are going to be FHA and conventional. Let’s break down their differences.
Consider the Down Payment
Arguably the biggest hurdle to overcome in becoming a homeowner is gathering a sizable down payment. This is all the more true in today’s climate. Many people struggle to save because their rent and insurance is extremely high. Or maybe they had fallen on tough times financially before and they had to rely on credit cards to get by. Thus, payments go to chipping away at debt instead of padding a down payment. This creates a vicious cycle of living paycheck to paycheck, and this is a very real reality for many today.
People in situations like the ones mentioned above are the ones that FHA loans were made for. They require a few more qualifications than a conventional loan does, but they can help you get into a home even with the bare minimum down payment.
Even with a conventional loan though, scrounging up a 20 percent down payment is not always required. It is ideal, of course, but you can put down 3,5, or 10 percent down when going the conventional route. The main caveat is that putting less than 20 percent down will mean that you must pay a PMI in addition to your mortgage. Private Mortgage Insurance works to protect the lender if the home is foreclosed on. Once you have paid 20 percent of your home, you can apply to have your PMI canceled.
Consider Your Credit
The other main deciding factor when choosing between FHA and conventional loans is going to be your credit score. The standard for conventional loans is 620 or higher. Whereas FHA loans can be granted even if your credit score is 500. The catch is that the lower your credit score, the higher your down payment requirements will be. If you have a low credit score and a low down payment, search out larger, national banks to work with. They are more likely to take on riskier borrowers.
These are the two main factors to consider when contemplating which loan is right for you. At the end of the day, this is a personal decision only you can make. Assess your finances and your credit score and start shopping for lenders.