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Traditional Mortgages vs. FHA Loans

Applying for a home mortgage can be confusing. There are traditional mortgages and FHA loans to choose between, even before you begin applying for credit. A traditional loan may be what you thought of first when researching mortgages, but is that the best mortgage option for you?

What is a Traditional Home Mortgage?

A traditional mortgage allows borrowers to choose between a variety of options, from short-term ARMs to 30-year fixed rates and anything in between. Traditional mortgages generally require a minimum down payment of anywhere from five percent to 20% and a credit score of more than 700. Credit score requirements depend on individual lenders and can vary. The requirements for a traditional mortgage tend to be a little steeper than those of FHA loans. If you have a great credit score and enough savings to put down a large down payment, however, the traditional loan may be the best option for you.

Traditional Mortgage Requirements

  • Down payment of at least 5-20%
  • High credit score
  • PMI is required if borrow puts less than 20% down
  • Debt to Income ratio of less than 30% (depends on lender)
  • Other fees and requirements may be tacked on by your lender

Drawbacks to traditional mortgages:

Traditional mortgages require a higher down payment and often come with many other fees including originations fees, mortgage insurance and appraisal fees making the upfront costs fairly sizeable. With a traditional mortgage you’ll always need a higher credit score or risk facing higher interest rates or added fees.

Advantages of traditional mortgages:

Traditional loans usually take less time to process than FHA or VA loans making them the best choice for those looking to borrow sooner. Loan One, a division of The Union Bank Company, offers in-house underwriting, however, and closes most loans with 21 days or less. The higher down payment also has its benefits allowing the borrower to build up credit quicker.

What is a FHA Loan?

The FHA Loan is a government backed loan covered by the Department of Housing and Urban Development that requires a minimum down payment of 3.5%. Credit score requirements for FHA loans are much more relaxed and can sometimes be as low as 620, depending heavily on the mortgage lender. Although it is easier to apply for an FHA loan, they are not always accepted everywhere; some condominiums are reluctant to accept FHA loans.

FHA Loan Requirements

  • 3.5% minimum down payment
  • Upfront mortgage insurance payment of 1.75%
  • Monthly mortgage insurance premiums for the life of the loan
  • Borrower must occupy the residence
  • A Debt-to-Income Ratio of less than 41%

Drawbacks of FHA loans:

Unlike the traditional mortgage, an FHA loan can be limited in terms of loan options and often may not fit your needs. Additionally, the FHA is not allowed on all property types like some condominiums and investment properties. The required mortgage insurance may also be an extra cost you may not be willing to deal with.

Advantages of FHA loans:

The FHA requires a much lower minimum payment at 3.5% making it much easier for those without a large savings to purchase a home. Also, credit scores requirements with FHA loans are much lower, a great option for those who have suffered credit issues in the past. FHA loans also don’t have a prepayment penalty for those looking to go this route.