Wednesday, April 9, 2014

Major Differences Between FHA Home Loans and Conventional Mortgages

The Federal Housing Administration (FHA), guarantees loans through the U.S. Department of Housing and Urban Development (HUD), within specific parameters and through specific lenders. While originally created for the benefit of first-time home buyers, and limited to one FHA-insured mortgage at a time, people who are not first-time buyers may also qualify. Unlike a conventional loan, the FHA requires certain property condition standards, as well as a termite report and clearance, in order to qualify for a loan.

 A conventional mortgage is a loan that is not insured by any federal agency, is not a government program, and can be obtained from most commercial lenders such as banks and mortgage companies. If you have 20% equity, a conventional loan will be the best choice most of the time. Conventional loans come in terms from 10 to 30 years, with some offering interest only options.

Conventional and FHA loans are relatively similar in some of their features. Both offer fixed and adjustable rate loan programs, as well as 15-year loan terms for borrowers concerned with building equity faster, or the lower payments of a 30-year term. Some of the benefits of an FHA mortgage include:

  • Low monthly mortgage premiums
  • Low, HUD regulated closing costs
  • Low down payment
  • No credit score requirements
  • Qualify even with previous bankruptcy or foreclosure

Qualifications

While a credit score of 620 will allow you to automatically qualify for an FHA loan, unlike a conventional mortgage, a credit score below 620 will not disqualify you. You may qualify for an FHA loan three years after a foreclosure, two years after a chapter 7 bankruptcy and one year after a chapter 13 bankruptcy, whereas a conventional mortgage may entail a waiting period from two to four or more years.

Down Payments

A conventional loan requires a higher down payment, typically ranging from 10 to 30 percent of the home purchase price, and based on the property type, such as condo or single-family home. An FHA loan requires a smaller down payment, typically between three to five percent of the home purchase price. In addition, an FHA loan allows accepting monetary gifts as a down payment, whereas conventional mortgage lenders do not.

Mortgage Insurance

Mortgage insurance assists the lender in recouping some of its loss in case you default on your loan. You will be required to pay an FHA insurance premium as a fee at closing, as well as a monthly premium, but the up-front payment may be financed into the loan. While you may or may not be required to pay for mortgage insurance on a conventional loan (depending on whether you make a down payment of 20 percent or more) there is no up-front charge.

The best loan program for you, whether FHA or conventional, is whichever one helps you accomplish your goals. Your perfect loan will address your out of pocket finances, the total cost of the loan for your anticipated time frame, and your specific budget and circumstances. Because there are so many variables, request a careful review by your lender to ensure that you are making the right choice. Submitting a full loan application and committing to an hour or so of analysis with your mortgage professional is key to finding the right answer.

A seasoned entrepreneur and mortgage industry veteran with over 15 years experience in managing and loan consulting. Prided in establishing successful Mortgage Consulting teams that create and foster long-term relationships with clients. Contact Allied Mortgage Direct
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