One of the big questions homeowners and potential buyers ask is, “Should I go FHA or Conventional and what are the pros and cons of each”. In this article I will address the pros and cons for both Refinance loans and Purchase loans.
During a refinance loan there are many factors to consider; Do I want cash back? Do I want to lower my term or just my rate? How does my credit effect my loan?” These questions are all valid and the answers are extremely important as to which type of loan product you choose. It will be easier to list FHA pros and cons, then Conventional pros and Cons for your review.
- Can go down to lower credit scores (580) in some cases
- For Purchase only 3.5%
- Because of the Insurance rates are usually lower
- If rates drop you have the ability to do a no appraisal no income check streamline loan in the future if rates drop
- Maximum loan is determined by county
- Property must be owner occupied
- There is upfront mortgage insurance and monthly mortgage insurance
- Can access 85% cash out of home on a refinance
- Higher credit scores required
- For Purchases 5% minimum down
- Interest rates are higher
- No Streamline option
- Does not have to be Owner Occupied
- No Mortgage Insurance required if 20% down or 20% equity on a refinance
- Can only access 80% cash-out on a refinance with a very high Interest rate
So, an FHA loan has a lot of benefits as far as smaller down payment, lower credit score requirements, and easier access to equity with better rates. Just note, there is a cost to this which often times is worth it depending on the situation. If your credit scores are a little low and/or you have a need to access equity in your home to payoff high interest rate credit cards and/or installment loans, most times the benefits outweigh the cost and FHA is the way to go. Now, the disadvantages would be if you have great credit and 20% equity in your home or a 20% down payment for a purchase than the mortgage insurance for an FHA loan could be more expensive.
As far as Conventional, this product has benefits as well, again depending on the situation. If you have 20% down on a purchase there is no reason to pay Mortgage Insurance. If you have great credit with more than 20% equity in your home and you are just looking to lower your rate than conventional would be the way to go. The disadvantage would be if you were looking to access equity up to 85% Loan to Value or if your credit scores are a little on the low side, in these cases conventional would be prohibitive and/or even more costly than FHA.
In conclusion, both FHA and Conventional have their pros and cons. They are both very different and very specific for each individual borrower’s needs. Loans aren’t and never should be one size fits all, as everyone’s credit, equity and need base situations are dramatically different. In the end, with the consultation of your Loan Officer you need to have your needs clearly addressed and pick the loan product that makes the most sense for you particular situation.