Federal Housing Authority (FHA) loans and Conventional loans both refer to different types of home mortgage loans, with conventional loans encompassing all mortgages regulated by the current Fannie Mae (Federal National Mortgage Association) and Freddy Mac (Federal Home Loan Mortgage Corporation) lending limits.
There are two main differences between these two types of mortgage loans:
- First, an FHA mortgage is less risky for the lender because it’s guaranteed by the federal government instead of by private mortgage insurance (PMI).
- Second, FHA loans are considered more accessible because they tend to require lower down payments, lower closing costs, and lower monthly payments.
FHA Home Loans Benefit Lenders and Buyers Alike:
The Federal Housing Authority created FHA loans to encourage more people to become homeowners by lowering down payment requirements and making mortgage loans more accessible to many more people, including those with a shaky credit history.
The FHA doesn’t lend money to buyers, but they guarantee mortgage loans so lenders don’t have to extend credit to borrowers. In a conventional loan, the borrower is usually required to purchase private mortgage insurance in order to guarantee the loan whenever the down payment amount is less than 20% of the total loan amount.
FHA loan borrowers must also purchase mortgage insurance, but it’s usually at a lower rate and overall cost since the federal government has already guaranteed that the lender will be able to recoup some of their money in the event the borrower defaults on the home loan. Riskier borrowers may be asked to pay heavier mortgage insurance premiums.
Other FHA Home Loan Benefits:
FHA loans are more accessible to a wider range of people than conventional loans. One big perk is the low down payment requirements, often as low as 3% (typically anywhere from 10 to 30% for a conventional loan).
Another big bonus is that the credit-qualifying criteria are lower.. people with very low credit scores can qualify, as well as buyers who’ve recently filed for bankruptcy or lost their last home to foreclosure. Other benefits include lower closing costs that can be even further minimized by working them into the home loan itself, and lower monthly mortgage insurance.
Why Choose A Conventional Mortgage over an FHA Mortgage?
One downside to FHA loans is the mortgage insurance premium that’s required to be paid at closing—typically 1.5% of the loan—although this premium can be worked into your monthly mortgage payments as well. In addition, borrowers are required to make monthly mortgage insurance payments too, although these payments are usually lower than the monthly PMI payments on conventional mortgages.
Buyers may prefer conventional loans because they come with more options for the loan duration as well as choice of lender. The FHA only works with certain lenders and usually approves 30-year fixed mortgages, while a conventional mortgage can give buyers longer or shorter payment periods with an adjustable or fixed rate through the lender of their choice.
FHA loans typically have more restrictions on the amount of money that can be borrowed than conventional home loans do. FHA lending limits vary around the country according to median income levels and housing costs.
However, the 2008 housing stimulus raised FHA loan limit rates in some areas and created the FHA Jumbo Loan for buyers in higher-cost areas, making FHA home loans available to an even wider range of potential home buyers.
Guest post courtesy of Brad Chandler, owner of Express Homebuyers. Brad writes about mortgage loans and a variety of other real estate topics on his website and blog.. including advice on how to sell your house fast.