Friday, January 3, 2014

FHA Vs Conventional Loans - Which is Better For You?

There are many different types of financing available to those looking to purchase a home or refinance their mortgage. The key to finding the right loan for a homeowner's individual situation is knowing what he or she needs from their mortgage and can afford. Homeowners should research the differences between what FHA loans and conventional loans have to offer to determine which financing option is best for them.

FHA Loan Information

The Federal Housing Administration (FHA) insures FHA loans, which protects the lender in the event that the borrower defaults on the loan. This insurance makes these loans less risky for lenders, and they are more likely to offer low interest rates on them. The FHA is fully committed to its borrowers and has assistance in place for borrowers who need assistance making their mortgage payments.

If an applicant has a credit score of at least 580, the down payment on an FHA loan will be 3.5%. If the applicant has a lower credit score, the down payment will increase to 10%. Although, while the FHA does allow for loans to be granted to people with credit scores below 620, most lenders today do not. The FHA also requires that applicants have at least one year free of any delinquent mortgage or rent payments. Overall, FHA loans have less strict credit and income requirements compared to other home loans.

With an FHA loan, the borrower must be financing his or her primary residence. There is also an upfront mortgage insurance premium (which just increased to 2.25% from 1.75%), as well as monthly mortgage insurance. These loans also allow homeowners to refinance a greater value of their home (up to 97%!) and feature a streamline refinance option, which requires less documentation and quicker processing.

Conventional Loan Information

Conventional loans are not insured by the government, so lenders mitigate their risk by imposing tighter qualification standards. These loans tend to have higher interest rates than FHA loans because the rates are more likely to be driven by a borrower's credit scores and other risk factors. With a conventional loan, an applicant needs to have a good credit score and income to receive competitive loan terms. These loans do not have to be used only on primary residences, but can also be used on investment properties.

The down payment on conventional loans tends to be higher, with the requirement currently set around 10% for most loans. Applicants will need to have a credit score of 660 or higher to be eligible and, in most cases, will need a 700 to receive competitive interest rates. There is no upfront mortgage premium requirement, but there will be monthly mortgage insurance if the borrower's loan-to-value ratio is greater than or equal to 80%. There are refinancing options with conventional loans, but the amount a homeowner can refinance is only 80% for a cash out and 95% for a non-cash out, compared to 85% and 97% respectively for FHA loans. There is also no streamline refinance option available.

Which Type of Financing is Right For You?

After assessing his or her financial situation and weighing the pros and cons of FHA and conventional loans, an applicant can determine the best loan for his or her situation. Different loans are beneficial for different types of situations and it is important to be well informed so the best choice is made. An FHA loan would likely be more beneficial for those wanting to borrow more than 80% of the purchase price or home value, those with lower credit scores, or those who do not have a lot of money for a down payment because they can have access to lower interest rates. This loan might also be better for borrowers who want a cash-out loan because they will likely receive a lower rate than with a conventional loan.

On the other hand, a conventional loan may be better for those who have excellent credit, those borrowing less than 80% of the purchase price/home value and those not wanting to get a cash-out loan because they can receive low interest rates and, unlike FHA loans, they will not have mortgage insurance if the loan amount is less than 80% of the purchase price or home value. For those who need further assistance choosing a type of loan, there are a variety of resources available. Speaking with a knowledgeable loan specialist is a good way to make the decision process less complicated.

Victoria Belle-Miller is the newest member of the FHAMortgageBank.com writing staff. Her background in journalistic writing and ability to evaluate the issues that Americans face in daily life make her a strong addition to the FHA loans team and a valuable source of sound mortgage advice.
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