Comparing FHA to Conventional Loans. Which Loan Is Right For You?March 26, 2010 When you're in the market for a home loan, you have many choices. But each type of loan has different qualifying criteria, rates, and terms. So, how do you know which type of home loan is best for you? Increasing in popularity is the FHA loan and its many advantages. An FHA loan is one that's insured by the Federal Housing Administration, which means the loan is backed by the federal government in the event the borrower defaults. Here's a closer look at how FHA loans compare to conventional loans. 1. Lower down payment requirements Down payment requirements on FHA loans go as low as 3.5 percent to those who qualify. Plus, down payments can be borrowed or given to the homebuyer as a gift. Conventional loans typically require a minimum down payment of 20 percent. If you're allowed to make a lower down payment on a conventional loan, you'll have to purchase private mortgage insurance. 2. Lower closing costs What lenders are allowed to charge as closing costs is regulated by the federal government. Because conventional lenders have more freedom in the way they charge for different services, closing costs on FHA loans are oftentimes lower than those associated with conventional mortgages. 3. Easier qualification guidelines Since FHA loans are backed by the federal government, qualifying guidelines are not as stringent as those associated with conventional loans. That means people with flawed credit histories could qualify for an FHA loan when they wouldn't otherwise qualify for a conventional loan. FHA loans are typically available to anyone who qualifies, provided the property purchased is a primary residence. 4. No prepayment penalty FHA loans don't include prepayment penalties. So if you want to pay your mortgage off early, you can without being fined or penalized. Some conventional loans offer this benefit, but some do not. That's why it's always a good idea to ask about it. 5. Mortgage insurance premium more cost effective With an FHA home loan, borrowers have to pay a mortgage insurance premium plus a renewal fee each year. But because down payment requirements are lower, it can be less expensive to pay insurance than it is to pay a higher down payment. 6. Reserve requirements waived Conventional loans require borrowers to pay the equivalent of 2 months' worth of principle, interest, taxes and insurance (PITI). FHA loans don't have this requirement. |
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