If you’re looking to purchase a home, the most traditional way to obtain financing is to use a Federal Housing Administration (FHA) mortgage or a conventional mortgage.
Each has its advantages and disadvantages.
The FHA is a division of the U.S. Department of Housing and Urban Development.
These mortgages have become more popular over the last few years because the qualification guidelines are more relaxed than those for conventional mortgages, though they are a bit pricier to obtain.
To purchase a home with an FHA mortgage, you must put down at least 3.5% of the purchase price. This must come from your own documented funds or from those of a close relative.
You’ll pay two types of mortgage insurance. The first is called upfront mortgage insurance, which can be financed. The other is monthly and will last a minimum of five years into the loan.
Credit guidelines vary from lender to lender and you will likely need a credit score of around 640 to qualify. There are normally no asset reserves required with FHA mortgages.
If you want to go with a conventional mortgage, the requirements are a little steeper, but the overall cost is lower.
Minimum credit scores will be a bit higher, close to 720, without a premium attached.
Buyers must also be able to show two months in asset reserves. If you can meet these two requirements, you can bypass upfront mortgage insurance, which can be significant.
Monthly mortgage insurance applies only if you are putting less than 20% down.
For more details on each of these programs, contact your mortgage professional.