FHA or conventional: what’s the difference and which option is better?

Conventional and FHA mortgage loans have been around for a long time. Both will most likely be around for much longer as well. Even with the recent “mortgage bust,” as Wall Street calls it, both types of mortgage financing are here to stay. Actually, with the foreclosure crisis being discussed in every newspaper and on every news channel in the nation, FHA loans are starting to become more and more popular again.

The FHA, Federal Housing Administration, has been insuring properties since it was established in 1934. The FHA tends to be more lenient when it comes to credit, credit scores, income calculations, and certain underwriting guidelines than conventional mortgage loans. The FHA was designed to help prospective homeowners purchase a home for less money and with easier qualifying criteria than typical mortgage loans. The FHA is the only government agency that operates without a penny of tax-generated money and operates only on self-generated income. Unlike traditional home loans, the FHA does not use credit scores as a primary determining factor in determining whether or not a consumer qualifies for a home loan. Instead, they take a deeper look at the consumer’s file, payment history, and overall value as a borrower.

FHA interest rates are generally very similar to conventional home loan interest rates, and qualifying is generally much simpler. So why doesn’t everyone get an FHA loan since they sound so wonderful? Well, FHA loans have stricter guidelines when it comes to a property, the condition of the property, and its appraisal requirements. Along with these FHA loans, add what is called a MIP fee on top of your loan amount, which is 1.5% of the loan amount. So if you were buying a house for 100,000, you would actually be borrowing 101,500. This fee is what is known as the Mortgage Insurance Premium. This is different from the PMI and the MIP is required in everybody FHA loans, regardless of down payment or home equity. FHA mortgage loans also require a monthly mortgage insurance premium that is included in your monthly payment for all loans that do not have at least 20% equity or a 20% down payment. So while there are advantages to FHA loans, there are also some disadvantages.

Conventional loans have also been around for a long time. While FHA used to own such a large percentage of mortgages with lower credit scores and more lenient income and underwriting guidelines, conventional loans have begun to introduce programs to compete with FHA loan products. Fannie Mae, or FNMA, has introduced a My Community loan program that allows for a minimal down payment and has far fewer restrictions when it comes to credit and credit scores. Freddie Mac, or FHLMC, has also introduced a product of its own called Home Possible to also compete with the FHA. Conventional loans are based more on credit scores, assets, compensation factors, loan terms, and other elements. Both of these products are becoming increasingly popular and are a great alternative to FHA loans in many situations. These programs allow for the same great conventional loan rates, lower credit score requirements than a regular conventional loan, and the ease and speed of the conventional loan process from start to finish. Conventional loans will also require the use of PMI for mortgages with no 20% down payment, but with some conventional loan products there are ways around PMI requirements. A MIP is not added to your loan amount on conventional loans as it is with FHA loans, but the PMI on a conventional loan is generally a little higher than the monthly MI on an FHA loan.

Therefore, both types of mortgage programs, FHA and Conventional, have their pros and cons, and both provide a quality mortgage product for qualified consumers. Some situations will require an FHA loan and with the recent subprime crisis and the upside down mortgage market right now, FHA loans are becoming more and more popular. However, I would still recommend contacting a conventional mortgage lender first to get your mortgage, and if you don’t qualify there, then try the FHA route. Neither type of mortgage is a bad decision and either option can get you into a home with one down payment. you can pay it It is a good choice.