If you are in the market for a loan to purchase a home, it is imperative that you learn the differences between a conventional loan, an FHA loan, and a VA loan. While all of these loans are typically offered by banks and other financial institutions, there are several differences between them. We at Somerville Bank are pleased to report that we offer all three types of loans. While we will work closely with you to determine which type of loan is suitable for your needs, we believe it is important to provide a comprehensive guide outlining the differences between these loans. In this two-part series, you will learn many important facts pertaining to these types of loans, and more! At the conclusion of this series, you will be provided with the details on how to contact Somerville Bank for further assistance.
Conventional Loans
A conventional loan is a type of loan that is not backed or otherwise insured by the government. If you fail to repay this type of loan, the lender has no guarantees. Due to this, most lenders will recommend that you place at least 20% down on the property that you have a desire to purchase. If you fail to put this amount down, a conventional loan will require you to obtain private mortgage insurance. Essentially, this insurance ensures that your lender is paid – in full – if you default on the loan. These loans adhere to the guidelines as set by the organizations known as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.
In order to qualify for a conventional loan, you must have a steady income. You must be able to afford the down payment and you must have good credit. The conventional loan poses a very high risk for those lenders who offer them. As a result, the income and credit requirements are much stricter than those for a VA or FHA loan. The VA loan and the FHA loan are backed by government-based insurance. This means they are considered less risky than a conventional loan.
FHA Loans
FHA loans are insured by the Federal Housing Administration. This means that if you default on this type of loan, the organization will repay the losses incurred by the bank that originally issued the loan. This is much easier to qualify for than a conventional loan. This type of loan is available for anyone; however, the loan limit varies based on the average costs of homes in a given area. If you opt for this type of loan, you will be required to pay a mortgage insurance premium. This premium is contributed to the Mutual Mortgage Insurance Fund. This is the fund that is drawn against when a borrower defaults on this type of loan. The FHA loan offers outstanding terms. Examples include a low down payment, financing on a portion of the closing costs, and very low closing costs.
Next week, we will cover VA loans.
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