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Difference Between Traditional and FHA Loan



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By : Roby Hicks    99 or more times read
It is essential that you know the different types of loans so that you will have an idea of what your options are. Borrowers have different needs and finding the right loan program to address their specific needs would definitely help. Among the viable options for borrowers who have low income and low credit score is the FHA loan. What makes this different from the traditional loans?

In order to understand their differences, let us understand each of them first.

The traditional loan:

As you may already know, traditional loan focuses on the credit score. This is why you need to make sure that your score is high. If you have high score, your loan will be approved easily. You will also have better terms for your loan payments. You will have the regular requirement for down payment and you will also have the average interest rate. This is the contrary if you have low scores. If your score is low, it is riskier to lend you the amount. This is why you can expect for the down payment and the interest rates to be higher.

The amount you can loan depends on the market value of the house you want to purchase. It will also depend on the lender’s evaluation, which is normally based on your credit score as well. If you qualify, you can have a 100% financing for the home purchase.

The lender will normally require a Private Mortgage Insurance if your down payment is less the 20%. However, there is no need for this if the down payment is at least 20%.

FHA loan:

FHA loan is different because this is guaranteed by the government. This does not mean that the government will be providing the loan. Instead, they will be insuring a portion of it. The qualifying guidelines for this type of loan are different from the traditional loan. Most people who apply for this type of loan are first time home buyers and those who have filed bankruptcy. Although the focus of the lender is not on the credit score of the borrower, there is still a minimum score for this, which is 620. It is also important that you find a lender that offers this program before you apply for the FHA loan.

Additionally, the amount that the borrower can loan is limited and it can be assumed by another person. The person who wants to assume the loan should also qualify. There are no penalties for prepayments as well, which means that the borrower can pay the loan in full before its due date.
The borrower is also required to pay 1.5% insurance. The said amount will be settled during the closing. The insurance will be renewed every year at 0.5% of the premium.

Before you pick a type of loan, assess your current financial condition first. What program suits you best? The FHA loan may seem affordable. However, the amount you can borrow is limited. If you can, it would be better to apply for a traditional loan. Just make sure that you have a good credit score.
Visit the Queen Creek Foreclosed Real Estate. There are also Private Houses in Queen Creek as well as Queen Creek Golf Course Real Estate.

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