Should You Get an FHA Loan or a Conventional Mortgage?

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Federal Housing Administration (FHA) loans and conventional loans remain the most popular financing types for today’s mortgage borrowers. But which program makes the most financial sense for you?

FHA Loans vs. Conventional Loans

The key to deciding which loan you should get is understanding the characteristics of both programs and how they relate to your financial picture. You could be a good candidate for either program, so select the loan that aligns with your payment and cash flow expectations.

  FHA Loans Conventional Loans
Credit Score Usually requires 500+ credit score Usually requires 620+ credit score
Credit History Shorter wait times after derogatory credit events like foreclosure, short sale, bankruptcy, and divorce Longer wait times after derogatory credit events, though some lenders may be flexible depending on circumstances
Down Payment As low as 3.5% As low as 3%, though there are advantages for a larger payment
Mortgage Insurance Requires both a 1.75% upfront premium and 0.45%–1.05% annual premiums Either a one-time payment or monthly fees from 0.55%–2.25% depending on credit, though these could be waived with a 20% down payment
Interest rate Tends to have lower interest rates than conventional loans Tends to have higher interest rates than FHA loans
Debt Ratio Allows higher debt ratios than conventional loans Allows lower debt ratios than FHA loans
Time for Approval Often takes longer to process Often takes less time to process

The Nuts and Bolts of FHA Loans

FHA loans are insured by the Federal Housing Administration, and borrowers must pay for mortgage insurance. The program requires two mortgage insurance payments: an up-front premium calculated at 1.75% of the loan amount and an annual premium that’s somewhere between 0.45% and 1.05% of the loan amount—depending on the length of the loan.

These mortgage insurance payments make FHA loans pricey. However, the program is flexible for homebuyers with credit scores as low as 500. Additionally, cosigners are permitted, and the wait time requirements for approval after short sale and bankruptcy tend to be shorter than they are for conventional loans.

Should You Get an FHA Loan?

The FHA program makes sense when you have little equity to work with or a unique financial situation. You’ll need at least a 3.5% down payment to purchase a home using an FHA Loan.

The program will go as high as the maximum loan limit for the county where the home is located. For example, in Sonoma County, California, you can get a loan of up to $554,300 for a single-family home.

The Nuts and Bolts of Conventional Loans

Conventional loans represent the lion’s share of the mortgage market. These loans, while the most popular, also contain tighter qualifying guidelines than FHA loans, including a minimum credit score of 620. And with a conventional loan, wait times after short sales and bankruptcy tend to be longer than those for FHA loans.

The trade-off for these strict guidelines is you don’t have to pay for private mortgage insurance if you have a high enough down payment. So even though conventional loans tend to have higher interest rates, you’ll save more over the life of the loan.

Should You Get a Conventional Loan?

If you have a credit score over 620 and a 5% down payment, you have the bare minimum required to apply for a conventional loan. Combine those with a strong employment history and payment-to-income ratio, and you’re a good candidate for the loan.

Remember, if you’re considering applying for a mortgage, it helps to know not only how much house you can afford but also where your credit stands before you begin the process. That’s because your credit scores help determine what types of rates and terms you may qualify for. You can get two free credit scores, which are updated every 30 days, on Credit.com.

Image: Ridofranz

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5 Reasons VA Loans Had Their Biggest Year Ever

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One of the most cherished benefits for veterans and military families is celebrating a tremendous milestone, not to mention making waves in the housing market.

With a big boost from much-coveted millennial homebuyers, the VA loan program set a new all-time record for mortgages in fiscal year 2016, according to the Department of Veterans Affairs.

The VA backed more than 707,000 loans, a 12% increase from last year and nearly double the agency’s volume from five years ago. Loans to help veterans and military members purchase homes were up almost 10% from last year’s numbers, a sign of the housing market’s continued recovery. The VA loan program’s fiscal year runs Oct. 1 to Sept. 30.

“Over the last five years, we’ve really focused our efforts to improve the efficiency of the program and to increase market awareness,” said John Bell, a Navy veteran and assistant director for loan policy and valuation for the VA loan program. “I think we’re seeing the fruits of that labor, so it’s an exciting time for us and for the veterans we serve.”

Here’s a look at five keys to this historic program’s biggest year ever.

1. Veterans Believe in Homeownership

Earlier this year, the nation’s homeownership rate (62.9%) fell to a 51-year low, according to the Census Bureau. Meanwhile, VA data put the veteran homeownership rate more around 80%.

Market share for this niche mortgage product in particular has soared since the housing crisis. This year’s record volume represents a 395% increase from a decade ago.

The VA has now backed more than 3.3 million home loans since fiscal year 2011. To put that into perspective, the VA didn’t guarantee 3 million loans in the 11 years prior to FY11.

“Homeownership for veterans is more personal than it is for many other people,” said Kenneth O. Preston, the 13th Sergeant Major of the Army. “To actually have ownership and a piece of the country that they defend is something that is very powerful.”

2. Conventional Financing Is Still Tough

VA loans were created to help give veterans a foothold in the housing market. During a time of tight credit and lagging income growth, they continue to be a lifeline for borrowers who might struggle to lock down conventional financing.

VA buyers can purchase with $0 down payment, no mortgage insurance and more lenient credit underwriting. Conventional loans often require a 5% down payment, monthly mortgage insurance and a more robust credit profile.

Through the first nine months of this year, the average VA buyer had a 706 FICO score, compared to an average 753 score for conventional buyers, according to Ellie Mae. (If you don’t know where your credit stands, you can get two free credit scores, updated every 14 days, at Credit.com.)

3. Lowest Average Mortgage Rates

VA’s rock-bottom mortgage rates surprise a lot of consumers, albeit it’s a pleasant one for many buyers. For 29 straight months and counting, VA loans have had a lower average rate than both FHA and conventional loans, according to Ellie Mae data.

The streak undoubtedly runs longer, but Ellie Mae didn’t start publishing VA loan data until, well, 29 months ago.

Pursuing conventional financing used to be a no-brainer for veterans with stellar credit and assets. And in some cases it may still be the best route. But VA’s low rates are giving many well-qualified buyers another reason to comparison shop.

5. Millennial Veterans Are Buying

The VA loan program’s benefits recognize the unique financial strains facing veterans and military members. Younger veterans and military families are seizing on the opportunity.

Bell said nearly a third of VA buyers in FY16 were millennials. That squares with recent survey data from the National Association of Realtors, which also found a surge in homebuying among younger veterans and military members.

“Despite having a lower median income ($76,800), more stable job security and no down payment financing options give aspiring homeowners in the military a deserving advantage over their civilian peers,” said Lawrence Yun, NAR chief economist.

6. Strides in Awareness

Surveys have shown that about 1-in-3 homebuying veterans didn’t know they had a home loan benefit. Education efforts by the VA, the Defense Department, mortgage lenders and real estate agents have all helped raise awareness about VA loans and their benefits.

To be sure, VA loans aren’t the answer for every military homebuyer. But for many military families, this historic benefit program continues to represent the most cost-effective path to homeownership.

“More than 70 years after its creation, this home loan benefit is still making a tremendous difference for veterans and their families,” Bell said. “We want to build on our successes to ensure that next year and the years to come provide even more value for veterans and their families.”

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