Searching the internet for the differences between 30 year fixed mortgages and FHA mortgages can be super confusing, especially when you throw FHA 30 year fixed mortgages in the ring. That’s right; some 30 year fixed mortgages are FHA.
So what’s the difference, and does it matter? There is actually a massive difference between the commonly known 30 year fixed mortgages and the FHA.
For ease, we will stop calling the 30 year fixed mortgage by that name and swap over to the less universally used term “Conforming Loans.”
Seeing as both can be 30 year fixed mortgage loans, it will only be confusing to continue using the same long-winded name.
What Is A Conforming Loan?
Before we can explain the difference between these two mortgage loans, we have to show you what they are.
Conforming loans are the most popular type of loan, and you get them through the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation. These two big names also go by another moniker Fannie Mae and Freddie Mac.
No matter which one you go with, Fannie and Freddie are only available to homeowners who need a loan of $484,350 or less.
That being said, some areas of the country that have unusually high home costs have allowed for higher loans. For example, San Francisco’s highest loan amount is for $726,525.
This doesn’t mean you cannot buy a home that is worth more than $484,350 (or your state’s higher equivalent); it only means that the loan cannot be higher than this amount. If you want a house worth $500,000, then you will need to pay a minimum deposit of $15,650 to get the conforming loan.
The “30 year fixed” term comes in when the lender tells you your payment increments. The idea is that you pay a fixed amount of interest on your monthly payments no matter if the stock market grows or shrinks. This means that you will know exactly how much is coming out of our bank account each month.
What Is An FHA Loan?
FHA loans are designed by the Federal Housing Authority to help aspiring homeowners get on the property ladder. These loans are made for people who cannot qualify for a normal conforming mortgage.
The most likely reason for someone needing an FHA loan is because they have a low credit score or they cannot put down a large chunk of money for the deposit.
If your credit score is between 500 – 579, then you may be eligible for an FHA loan; however, you will need to be able to put down a 10% payment of the house you want to buy.
If your credit score is 580 or higher, you can qualify for an FHA loan with a down payment as low as 3.5%.
The two factors above are the most important features of the FHA loan. If you worry that you cannot make a large down payment or have a low credit score, but one of the two paragraphs above is achievable to you, then you should be thinking about an FHA loan.
However, suppose you can get a conforming loan. In that case, you shouldn’t be tempted by the low 3.5% down payment, as you will be required to pay an additional mortgage insurance (known as Premium Mortgage Insurance, or PMI) throughout the life of your mortgage. This is because you are joining a high-risk bracket.
The Key Differences Between A Conforming Loan And An FHA Loan
The key difference between a conforming loan and an FHA loan is to do with who they are aimed for.
A conforming loan is aimed at the average borrower. They often ask for 5% to 10% of a down payment for accepting your mortgage loan request to make sure that you can pay the monthly mortgage instruments.
An FHA loan is aimed at someone struggling to buy a home. They ask for a 3.5% down payment on a mortgage offer because they recognize that you probably don’t have a large amount of money.
Because FHA loan borrowers don’t have a large amount of money on hand, they need to pay insurance for at least 60 months but likely for the whole mortgage. This is so that the government doesn’t lose money while helping you onto the property ladder.
On the other hand, conforming loan insurances last until you have paid 22% of the mortgage, thereby proving you can handle the payments.
As you can probably tell, the main difference is whether you can afford a house now or need help.
If you need assistance, you will pay more in the long run, but you will be able to get a house. If you don’t need help, you just need to make a large one-time deposit to ensure the lender doesn’t lose money.
Which Loan Is Better For Me? 30 Year Fixed Conforming or FHA?
The best way to figure out which is the best loan for you is by following this basic rule of thumb:
Do you have a credit score of 500 and 579 and cannot pay a 10% down payment?
– Ask a loan officer for advice, as you probably won’t be accepted for a mortgage.
Do you have a credit score of 500 and 579, and can you pay a 10% down payment?
– Apply for an FHA Mortgage.
Do you have a credit score of 580 or higher and cannot pay a 3.5% down payment?
– Ask a loan officer for advice, as you probably won’t be accepted for a mortgage.
Do you have a credit score of 580 or higher, and can you pay a 3.5% down payment?
– Apply for an FHA Mortgage.
Can you pay a down payment of 4.99% or less with a 580 or higher credit score?
– Apply for an FHA Mortgage.
Can you pay a down payment of 5.00% to 19.00% with a 580 or higher credit score?
– Ask a loan officer for advice as your personal circumstances might suggest either option.
Can you pay a down payment of 20% with a high credit score rating?
– Apply for a Conforming Loan Mortgage.
