Michael J. BovairdLoan Officer NMLS#: 223593
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This is the second in a two-part tutorial that explains the different types of mortgage loans in New Jersey. Last time, we looked at the differences between fixed and adjustable-rate mortgages. This article explains the key differences between FHA and conventional home loans in New Jersey.
The primary difference between conventional and FHA loans has to do with insurance backing:
- FHA loans are insured by the government, through the Federal Housing Administration. This insurance protects mortgage lenders from losses resulting from borrower default. But the government backing benefits borrowers as well, as we will discuss in a moment.
- Conventional loans are originated (and sometimes insured) solely within the private sector. Unlike FHA loans, the government does not insure or guarantee these mortgage products against losses. So you can think of a New Jersey conventional loan as a “non-government-backed” mortgage option.
Advantages of FHA Home Loans in New Jersey
The FHA loan program is managed by the Department of Housing and Urban Development (HUD). According to current HUD guidelines, borrowers who use this mortgage program can make a down payment as low as 3.5% of the purchase price or the appraised value.
This is one of the primary advantages to using an FHA loan when buying a house in New Jersey. It allows you to make a relatively low down payment / investment on your home purchase.
Additionally, FHA loans have fairly flexible qualification criteria and requirements for borrowers. This is largely due to the government insurance mentioned earlier. Generally speaking, borrowers have an easier time qualifying for FHA loans than conventional mortgages mortgage products.
First-time home buyers, in particular, flock to this program. But it’s certainly not limitedto first-time buyers. Even those who have owned homes in the past can apply for an FHA loan in New Jersey. (It’s popular among first-time buyers due to the low investment requirement.)
Advantages of Conventional Loans
A New Jersey conventional home loan receives no government backing. This is what distinguishes them from the FHA mortgage products mentioned above.
Borrowers who use conventional loans with a down payment of 20% or more can avoid paying mortgage insurance. That’s the primary advantage to using a conventional home loan in New Jersey.
We will talk more about mortgage insurance in a moment. For now, just know that if you use a conventional loan in New Jersey with a large enough down payment, you could avoid the extra cost of mortgage insurance.
Understanding Mortgage Insurance
When home buyers take out a mortgage loan with a down payment of less than 20%, mortgage insurance is usually required. This insurance is typically required whenever the loan-to-value ratio rises above 80%. This is true for both FHA and conventional home loans (though the type of insurance varies depending on the type of loan you use).
When this insurance coverage is applied to a conventional home loan, it is referred to as private mortgage insurance, or PMI. The average cost of private mortgage insurance in New Jersey usually ranges from 0.5% to 1% of the loan amount, paid on an annual basis.
FHA loans require mortgage insurance as well, due to the low down payment mentioned earlier. With this program, there is an upfront and an annual premium. The upfront premium for an FHA loan in New Jersey is usually 1.75% of the base loan amount.
The annual premium varies based on the loan amount, the term, and the down payment. Most borrowers who use this program end up paying 0.85% for the annual premium.
Mortgage insurance is a key consideration when choosing between FHA or conventional home loans in New Jersey. While both mortgage types might require insurance protection with a lower down payment, the cost of the insurance can vary. So it’s important to understand the full cost of the loan you are considering, and to compare it to other mortgage types to see if there is a potential for savings.
Let’s explore your options. NJ Lenders Corp. can present you with several options and cost estimates based on different types of home loans. Please contact us if you have questions about this subject, or if you would like to receive a quote.