So, you’re thinking about achieving the dream of owning your own home… The big question that follows the desire to own is “How will I afford it?”  There are several different loan options, but two of them are more common than the rest.  Conventional and FHA are the two that you will hear about the most.

 

What is the difference?

Most first time home buyers will go for the FHA loan.  The reason for this being that the FHA has less strict requirements to get qualified.

FHA Requirements:

Minimum down payment: 3.5%
Minimum credit score: 580
Maximum debt-to-income ratio: 50%

Conventional Requirements:

Minimum down payment: 5% to 20%
Minimum credit score: 620
Maximum debt-to-income ratio: 43%

 

Most first time home buyers aren’t as well established and have a higher debt-to-income ratio, as compared to people who have purchased a few homes in their lifetime.  If buying a home is nothing new to you, then you probably have more solid assets than someone that is looking to take the plunge for the first time.  Having solid assets gives the lender more confidence that you won’t default on the loan.  The conventional loan doesn’t require you to purchase mortgage insurance, while the FHA does require insurance.  The FHA loan is backed by the Federal Housing Administration, which is why it requires mortgage insurance to help protect the lender from more risky applicants.

 

Is one better than the other?

It all depends on you situation.  If you have the money for the down payment and meet all the requirements for a conventional loan, then it certainly is the way to go.  Conventional doesn’t require mortgage insurance and you can get a higher loan, giving you more buying power.  FHA is a good loan for people starting out, but it’s a good idea to refinance and move to a conventional loan when you are more financially stable in the future.

 

Deciding to buy a home and starting to think about taking the first few steps toward that goal can be a scary process.  Once you start, you realize that most of that fear was an illusion and wasn’t necessary.  Having realiable agents to help walk you through the process can help eliminate a lot of that fear and get you to your end goal of owning a home!