Are you planning to buy a home and you are not sure which option to choose between the 3% conventional loan and 3.5% FHA loan? Do not worry; just ensure to read this write-up to the end, and you would know the best mortgage option to choose.
Choosing the right mortgage is crucial to your home buying experience and peace of mind. For a long time, potential homebuyers have always been at a crossroad when choosing the right mortgage for their dream home. In order to clear the air of any confusion, the benefits of 3% conventional loan over the 3.5% FHA loan are presented in this write-up.
When considering your choice between the mortgage options, you should know some factors that they share - credit score, down payment, and future goal. Both 3% conventional loan and 3.5% FHA loan require you to have a minimum down payment, although the amount requested is different. The two mortgage options expect you to have a particular credit score you must meet before you can qualify. And lastly, there is a need to have mortgage insurance, although it is handled differently by each of the options.
What Is a Conventional Loan?
A conventional loan refers to the type of mortgage that does not have the backing of the government or is not covered by any government program or agency like the FHA, the Federal Housing Administration, the Department of Veterans’ Affairs (VA), or the Department of Agriculture (USDA). Consequently, the lender of such loan bears the risks involved with the loan issued.
3% conventional loan, in most cases, is linked to conforming mortgage, which meets the requirements laid down by Freddie Mac and Fannie Mae and loan limits.
What Is 3.5% FHA Loan?
3.5% FHA loan is the mortgage that is backed by the government and insured by the Federal Housing Administration. This category requires insurance, which is paid by the FHA borrowers to protect the lender from a loss if the borrower fails to repay the loan.
Why 3% Conventional Loan Is Better Than a 3.5% FHA Loan
While it may seem confusing which of these mortgages to choose, the benefits that 3% conventional loan offers outweigh the benefits of the 3.5% FHA loan. Here are some of the reasons why 3% conventional loan is better.
1. Less Money Down
3% conventional loan requires lower down payment than the 3.5% FHA loan. Going by the requirements of the two mortgage types, the conventional loan attracts only 3% (three percent) down payment of the amount of mortgage applied for while the Federal Housing Administrating loan requires a payment of 3.5% (three-and-a-half percent) of the mortgage that the borrower is applying for.
2. Credit Score
Although the FHA loan has less stringent credit score requirement, 3% conventional loan is better because there are mortgage lenders that would offer loans with a credit score as low as 620 while even at 580 minimum credit score required by the FHA loan fewer mortgage lenders are willing to approve loans as that credit score.
3. Avoidable Private Mortgage Insurance (PMI)
The private mortgage insurance required by the FHA loan is 1.75% of the loan amount payable upfront and an annual premium of 0.45% to 1.05% while the private mortgage insurance required for 3% conventional loan is 0.5% to 1% of the loan amount per year. However, you can avoid PMI altogether by paying at least 20% down payment, which is not possible when you choose the FHA loan.
Even when you don’t have 20% down payment to avoid PMI, there is nothing to worry about as PMI will be cancelled when the LTV reaches 78%.
4. Interest Rate
When you choose 3% conventional loan, there are two types of interest rate available - the fixed rate and the variable. You can decide which of the two rates to be applied to your mortgage while FHA loan has only the fixed rate.
5. Long-Term Economic Viability
A higher credit score or an increase in credit score makes 3% conventional loan more attractive ass the mortgage rate reduces and also the Private Mortgage Insurance, but with the FHA, the mortgage rate and insurance premiums remain the same regardless of an increase in the credit score. Consequently, 3% conventional loan is economically viable for borrowers having credit scores that are above average.
6. Loan Processing Procedures
3% conventional loan is easier and faster to process as borrowers deal with the lender directly without requiring the government approvals while permitted only FHA-approved lender are permitted to lend to borrowers. As a result, the application and processing of 3% conventional loan are less complicated and have shorter approval procedures.
7. Lower Lender Fees
Since the government does not set fees for private lenders, 3% conventional loan offers varied lender fees. As a result, you can compare fees and other factors and benefit from the lower lender fees since you can save some money.
8. Type of Property That Can Be Financed
Borrowers of conventional loan can be used it to finance a primary residence, a second home, a rental property or vacation property such as a single-family residence, 2-4 unit property, a duplex, and a condominium while FHA loan can only be used to finance a primary residence.
9. Accessible Loan Limits
3% conventional loan offers a higher maximum loan amount of up to $424,100 while FHA offers lower maximum loan limit of $271,050. As a result, you can finance a property having a high value with the conventional loan more than it is possible with FHA loan.
In some high-cost area, the conventional loan limit can be as high as $625,500.
Considering the benefits that the 3% conventional loan has over the Federal Housing Administration (FHA) loan, the conventional loan is unarguably more preferable to the FHA loan. It has more flexible and cost-effective options with faster processing time and easier requirements.
Making an authoritative declaration in support of 3% conventional loan, Fred Franks of Local Realty Service stated: “I have closed over 40 deals with customers using the 3% Conventional Loan program, it has saved my customers thousands of dollars!”
If you are searching for the best mortgage to finance your home buying, visit www.localrealtyservice.com to be guided in choosing the most suitable 3% conventional loan. Local Reality Service is a professional and experienced mortgage expert guiding potential homebuyers looking for the right mortgage to make their dreams come true at the lowest cost and highest value possible. Remember that choosing the right mortgage expert, a realtor that understands the intricacies and nitty-gritty of the conventional loan is crucial to getting your mortgage approved faster and realizing your goal, almost effortlessly. Choose Local Reality Service; be guided.