Is an FHA Mortgage Really the Better Option?
Most everyone has been told that a mortgage loan through the Federal Housing Authority is the best thing since sliced bread, especially for first time home buyers. For the most part, FHA loans are available in resort areas like Pensacola or any beach, as long as you’re financing a primary residence. But is it always the best idea? Here are some reasons why a conventional loan might be better.
One of the biggest reasons in years back to choose an FHA loan was the low down payment. Where conventional loans required as much as 5-10% down, FHA mortgages will finance all but 3.5% for the down payment. But guess what? Times have changed, and now a conventional mortgage can actually accept as much as 97% financing - or a 3% down payment. So it pays to check both!
This one is tricky. While FHA loans will usually have a lower interest rate, there is a caveat involved. If you choose to put down less than 20% on either type of mortgage, you'll be required to purchase Mortgage Insurance, or PMI. This is an extra insurance policy to help protect the lender because a lower down payment means a bigger risk of default or foreclosure. The extra monthly payment amount to cover PMI can be significant if you're on a tight budget.
A conventional loan has the advantage here, though. Once you have made enough payments to equal having 25% down on your home or condo, you can petition the conventional mortgage holder to drop the PMI insurance. If your credit is good and you've made the payments on time, they will usually remove the requirements and your payment will be noticeably lowered. If you were required to purchase the PMI on an FHA loan, it remains in effect (and out of your pocket) permanently. Over the life of a 30 year loan, this can represent a large savings.
Debt to Income Ratio:
In this, the FHA loan has the decided advantage. The FHA allows you to have more debt in almost every case. If you've got a big car payment or student loan, you may need the extra leeway with your debt to income ratio requirements.
Qualifying for the Loan:
The FHA loan will be easier to qualify for than the conventional loan. If your credit or FICO score is not perfect, you may have to accept some of the less than optional requirements to overcome this. All credit requirements are less strict now than they were after the real estate crash in the 90's, but the FHA loan qualifications will be more forgiving of minor credit issues.
Speaking with a mortgage professional during the pre-approval process will address all these pros and cons and help you to decide which one is more beneficial to you. We can help with this. If you're looking to buy a home in Pensacola or a Destin condo as a primary residence, be sure and ask about this when getting pre-approved. As your Pensacola Realtor, we can refer you to a mortgage broker who will discuss these things and help you decide.