FHA vs. Conventional – Which of the Two Most Popular Homes Loans in Austin is Right for You?
Posted: Wednesday, December 16, 2009
by Brian Talley
Austin real estate
Not too long ago the large majority of home loans whether you are talking about Austin or anywhere in the USA were conventional loans. FHA for many years had made up a very small portion of the home purchasing process. But in the last few years FHA loans have soared and now account for 7 out of every 10 loans. Let's look at why that transformation has occurred and which loan might be best you as you look to buy a home in the Austin area.
Why are FHA loans so popular as of late?
The answer is simple, the mortgage collapse of 2008. Before lenders began to go out of business right and left the most popular home loans were conventional loans and the main reason was 100% financing. With a credit score of 620 or better borrowers were eligible for conventional loans that covered 100% of the purchase price. But when many of those homeowners defaulted and went into foreclosure that loan option went away along with hundreds of lenders we might add. That left FHA's modest 3.5% down payment as the best method to buy a home for those with limited dollars.
For what type of buyer would an FHA loan be the best option?
Buyers and borrowers with credit scores in the 600's, 620 to 680 find that many times FHA will provide an easier approval and better interest rates than conventional loans. Also keep in mind that FHA only allows loan amounts of about $288,000 in central Texas. So while the purchase price of your new home might be more than that amount, the actual loan amount has to be no greater than that figure.
Unlike years before when companies like Nehemiah or Neighborhood Gold could "loan" you the money for the down payment, FHA no longer works with these programs. The 3.5% down payment (You can put down more if you like) must either come from the buyers' own funds or a gift from an immediate family member. Often times we will see for instance a first time home buyer get a gift of the down payment from their parents or other family member.
Are FHA loans only for first time home buyers?
No, anyone can use an FHA loan to buy a home. It is important to know that FHA loans can only be used to purchase a primary residence. The loan does not allow investment property purchases.
How do conventional loans compare?
Conventional loans are great for people with higher credit scores and larger down payments. With a down payment of 20% they avoid paying mortgage insurance (often referred to as MI or PMI) making for a lower payment.
Do I have to have 20% down to use a conventional loan to buy a home?
No, you can actually buy a home with as little as 5% down although interest rates are better with a 10% down payment.
How is my interest rate determined with an FHA or conventional loan?
Many people may see this as a big mystery but the days of lenders charging higher rates to some and lower to others with the same credit scores has all but ended. Your interest rate for either type of loan is based on 2 things; your credit score and how much money you are putting down. As mentioned before, FHA is slightly more lenient on buyers with scores in the 620-680 range than conventional but with either loan you will still receive a better interest rate for a score of 720 than you will for a score of 660. As far as the down payment is concerned, FHA loans offer the same interest rate no matter the size of the down payment while rates for conventional loans are better when the down payment is larger.
FHA loans and conventional loans team up to provide the answers for most borrowers today. The "easy qualifying" loans though that did not require proof of income are long gone with the new mortgage industry regulations. Today no matter which loan program you choose be prepared to prove your income through pay stubs and W-2's and in some cases tax returns. Good loans are still available to those with good credit which has kept the Austin home market alive and well even in tough economic times.
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