Before I got really into house hunting and trying to guess how much our monthly expenses would cost each month with a mortgage, homeowners insurance, property taxes, and so on, I had no idea there were different kinds of loans you could take out to get a home. I thought you had to put 20% down on a house no matter what, and I had absolutely no idea what an interest rate was. Well, guess what, there are several different types of loans. Two of the most common loans talked about are FHA loans (Federal Housing Administration), and conventional loans.
FHA loans are really great if you are a first-time homebuyers and you are just trying to get into a house. You don’t need to have a really great credit score and you can put as little as 3.5% down to get you into a home. FHA loans are a really great option for someone who just wants to get into a home and quickly, and it is something we really considered for ourselves!
What I didn’t like about getting an FHA loan is that you have to pay MIP (monthly insurance premium) for 11 years after you buy your home if you pay 10% down or for the entirety of the loan if you put down less than 10%. I am not sure if that would still apply if you refinance into a conventional loan, though. But for me that just seemed like a really big hassle.
With a conventional loan, you can actually put down as little as 5%. If you put down anything less than 20% for your down payment, though, you have to pay PMI (private mortgage insurance) until you reach that 20%. It is really easy to get your home appraised after a few years and be able to get that PMI taken off of the value of your home if it goes up significantly during that time. But if the market crashes or something (which who knows what could happen with everything going on in the world today) then you just have to continue to pay that PMI until you hit 20%.
The hard thing about conventional loans, for some people, is you have to have a higher credit score (620-640, or higher). Another area that can be hard is that you, generally, have to have a debt-to-income ratio of 45% or lower.
Our Decision to go with Conventional
For Tanner and me, though, a conventional loan felt like the best choice for us. We have really good credit scores and we don’t have any debt. Because of those two things, I think it makes much more sense for us to do a conventional loan. We also think it would be easier to put 5% down with a conventional loan and then try to get our home appraised in a few years and shave off that PMI.
I am no expert with home buying, loans, and financing, but this is what I know and what we are planning on doing when it comes time to close on our house. I am so glad I got more educated on loan options because I thought we wouldn’t be able to afford a home for years if we didn’t get 20% to put down on a home. Look into what loans are available to you based on your credit score and financial situation in life.