FHA Loans vs. Conventional LoansFHA loans are loans that are backed by the government, the Federal Housing Administration, whereas conventional home loans are secured by government sponsored entities or GSEs such as Fannie Mae and Freddie Mac. It used to be that the main advantage of an FHA home loan was that the qualification requirements for borrowers were not as strict as those required with conventional mortgages. A borrower with a lower credit score who wouldn’t qualify for a conventional home loan could secure an FHA loan without any issues. But FHA loans have become very popular again, especially since the loan limits have increased in many parts of the country. It’s not uncommon for financially secure homebuyers to pursue FHA loans out of preference. Conventional Home LoansConventional home loans, however, have remained equally popular. The 30 year fixed rate mortgage is still the major standard in the industry, and adjustable rate mortgages, jumbo loans, and other mortgage types are common. Conventional financing can be used to fund a home purchase or mortgage refinance. These loans are plentiful and offered by many lenders. Banks and brokers often prefer to work with conventional borrowers, because these loans typically present less risk than other loans. FHA Home LoansStill, with the new loan limits, low qualification requirements, and other benefits, an FHA loan might be perfect for you. The FHA allows borrowers who have had a few credit problems or have no credit history to buy homes, and this is a benefit that conventional financing can’t offer. The FHA will require explanations for any negative marks on your credit history but will use common sense underwriting. Borrowers with extenuating circumstances surrounding bankruptcies discharged within the prior two years can work around these credit hurdles, and borrowers with low credit overall often have options available to them with the FHA. Conventional financing, on the other hand, relies heavily upon credit scoring. A credit score is a rating given by a credit bureau, such as Experian, Trans-Union, or Equifax, that ranks your credit profile. For each inquiry, derogatory credit mark, or public record that shows up in your credit report, your score is lowered, even if these items are erroneous. One major downside to FHA financing is that borrowers are required to take out and pay for private mortgage insurance. This is an obligation that all FHA borrowers must fulfill. This can add a significant expense to the borrower’s monthly mortgage payments. To learn more about FHA loans, visit the FHA loan page at the HUD. The DifferencesThe differences between an FHA loan and a conventional loan are many, but the differences in value are subjective. If you have low cash reserves and can’t afford a down payment or you have a low credit score, consider an FHA home loan. If you’re ready to secure a mortgage with one of the best mortgage rates available and you don’t want to pay for private mortgage insurance, seek a conventional home loan. |
|
