Conventional vs. FHA vs. VA loans in Kentucky
One of the big questions you’ll have to answer when you are ready to buy a home is what type of mortgage loan to choose. There are plenty of options out there, with conventional and FHA being among the most popular. Here’s what you need to know about these common mortgage choices.
Funding
Federal Housing Administration (FHA) loans are backed by that government agency with the intention of making mortgages more affordable to lower-income homebuyers. Those with less-than-ideal financial qualifications have found help from FHA loans.
Conventional loans are guaranteed by the government-sponsored entities Fannie Mae and Freddie Mac. These are not directly made or backed by the federal government, but once made by a private lender, Fannie or Freddie promise to buy them, taking the risk away from the lender and giving them more incentive to make more loans.
Down Payment
The minimum down payment requirements are similar between FHA and conventional loans. Depending on the borrower’s credit score, it can be as low as 3.5% for FHA and 3% for conventional. With both mortgages, borrowers can receive up to 100% of their down payment funds from gifts, making it easier for parents or grandparents to help homebuyers get into their first house.
Credit Score
A conventional loan requires a higher minimum credit score (620) compared with an FHA (500 to 580.) Of course, the better your credit score, the better your mortgage interest rate will be.
Mortgage Rate
Interest rates on both types of loans tend to be very close, with FHA sometimes coming in slightly lower. The rates are mostly determined in either case by your credit score, down payment, loan-to-value ratio, and your other assets. Rates can also vary from lender to lender.
Mortgage Insurance
With conventional loans, borrowers must pay private mortgage insurance (PMI) until they have 20% equity in the home. That can happen by either paying down the principal of your loan over time, or gaining equity as your home value rises along with the market, or a combination of both. Until you reach that threshold though, you will have to pay PMI premiums to help protect your lender against possible default. This can cost you anywhere from 0.5% to 1.75% of your loan total every year. If you took out a $300,000 mortgage, and paid PMI at 1%, you’d be shelling out an extra $3,000 a year. The good news is that payment will disappear after your equity reaches 20%.
With FHA loans, you are required to pay mortgage insurance for the life of the loan. The rate is 1.75%, so the total cost may end up being more for an FHA than a conventional. However, you can refinance out of an FHA to a conventional down the road to eliminate that mortgage insurance premium.
Give us a call today and we can discuss your particular situation and help you pick the option that is best for you!
Conventional loan
A conventional loan isn’t insured or guaranteed by a government entity. You can take one out through a private lender like a bank, credit union or mortgage company. While conventional loans are more difficult to qualify for than government loans, they’re also usually more flexible.
- Minimum credit score: 620
- Minimum down payment: 3-5%
- May be good for: Borrowers with good credit and minimal debt
Fannie Mae HomeReady
HomeReady is a conventional mortgage loan offered by Fannie Mae. If you apply for one, you can use income from your parents, grandparents, relatives and others to help you get approved. Upon approval, you may get rid of your private mortgage insurance, or PMI, after you pay down 20% of your home’s value.
- Minimum credit score: 620
- Minimum down payment: 3%
- May be good for: Borrowers with lower-than-average incomes
FHA loan
FHA loans are insured by the Federal Housing Administration. While these loans have low down payment and credit score requirements, you’ll be required to pay mortgage insurance to protect the lender in the event you default.
- Minimum credit score: 500
- Minimum down payment: 3.5% if your credit score is 580 or higher; 10% if your score falls in the 500-579 range
- May be good for: Borrowers with lower credit scores and down payment amounts
Freddie Mac Home Possible
The Freddie Mac Home Possible mortgage has a low down payment of 3%. But in order to qualify, you can’t earn more than 100% of the annual median income in your area.
- Minimum credit score: 680
- Minimum down payment: 3%
- May be good for: Borrowers with lower incomes and down payment amounts
USDA loan
Backed by the United States Department of Agriculture, a USDA loan is a low-interest, zero-down-payment mortgage that can help you finance a home in an eligible rural area.
- Minimum credit score: no minimum score
- Minimum down payment: 0%
- May be good for: Borrowers with low to moderate incomes who want to buy a home in a rural area
VA loan
A VA loan is guaranteed by the United States Department of Veterans Affairs. As long as you’re an active service member, veteran or eligible spouse, you may get approved for a VA loan with 0% down and no PMI. But keep in mind that you’ll likely have to pay a funding fee of up to 3.6% of your loan amount.
- Minimum credit score: no minimum score
- Minimum down payment: 0%
- May be good for: Borrowers who are active service members, veterans or eligible spouses
Louisville Kentucky Mortgage Loans 
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