Monday, July 14, 2014

FHA Loans Vs Conventional Mortgages - Which Option Is Better?

During the housing market boom, which lasted from 2003 to 2007, most home buyers (around 90%) chose to take out conventional mortgages. After the market went down, the situation changed dramatically and in 2009 some 40% of all home loans were FHA loans. It is 2014 now and you are naturally asking yourself which option is better given that interest rates have gone down and the market is recovering. Use this comparison to decide.

FHA Loans

The Federal Housing Administration home loans are designed to help first-time home buyers with low income to get their dream house. It is important to note that the low-income criterion varies considerably from one US state to another and in most cases individuals with average and even above-average income can qualify.

Pros:

- Low down payment - The down payment with FHA loans is 3.5% while with conventional mortgages is 5%. The lower down payment means that you need fairly small savings in order to get your dream home. This is a great benefit.

- Easy to get - You can qualify for such a loan with credit score of just 620, debt-to-income ratio of 57% and 3.5% down payment. In order to qualify for a conventional loan, you will need credit score of at least 680, debt-to-income ratio of 45% or lower and 5% down payment. It is certainly easier to meet the first set of criteria.

Cons:

- Growing costs - This is due primarily to the mandatory mortgage insurance, whose annual premium can be as much as 1.35% of the total outstanding loan amount. There is also an upfront fee of 1.75% which the borrower has to pay. That way, an FHA product can become much more expensive than a conventional mortgage.

- Smaller borrowing amounts - There are lower limits for the maximum borrowing amounts so you may not be able to afford the house that you need.

Conventional Mortgages

These are commercially available home loans. They are offered by banks, credit unions and specialized lenders. They are not backed by the FHA.

Pros:

- Various opportunities to save - With a credit score of 740 or higher you can secure lower interest. You can do this with a larger down payment, with buying credit points and with proper comparison shopping as well. If you make a down payment of 20% of the property value, you will not have to buy insurance so you can save on the premium. These are just some of the main saving options.

- Great flexibility - You can select from a huge range of mortgages depending on your requirements. You can go for fixed or variable interest, for a 15-year or 30-year loan or for a jumbo loan which allows you to borrow a large amount of money. You can take advantage of special deals.

Cons:

- Stricter requirements - As explained earlier, you need a fairly high credit score, low debt-to-income ratio, considerable savings and good credit history.

Conclusion

Overall, if you can qualify for conventional mortgages, they are certainly the better option. If not, you should consider FHA loans. In any case, you will need detailed financial planning in order to qualify and minimize the risk of default.

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