Mortgage professionals are a great resource when seeking a home mortgage. They guide you through the entire process but they also should be educating the prospective home buyer on the different loan packages available. One such area is the conventional loan program versus the FHA loan program; many have heard the different terms but may not understand that there is a difference between the two types of loans. This article takes a look at the main differences between the two.
The first difference a consumer will notice is the FHA loan requires a lower down payment for the mortgage as compared to a conventional loan. The FHA minimum down payment is 3.5% compared to a minimum of 10% for a conventional loan. As part of the down payment the FHA program will allow a consumer to accept a gift to cover the down payment but in general conventional lenders will not allow this. One key to both of these types of loans is that having a down payment that is less than 20% requires that mortgage insurance be paid to help lenders recoup some of the money in case of default. This private mortgage insurance (PMI) will definitely increase your monthly payment so keep that in mind when figuring your monthly budget. The good news is that when you have reached 20% equity in your home, you can request to have the PMI cancelled. Doing this can save the homeowner $50-$100 a month.
FHA loans also have more relaxed credit guidelines as compared to a conventional package. The FHA program may be the one for those who have minor credit issues compared to conventional loans where credit scores can significantly affect interest rates based on the scores that are below 720. Keep in mind that these lenders each have different standards to what their cut off is for credit scores.
FHA loans are typically 30 year mortgages and a home buyer will not find the flexibility of options that a conventional lender can offer to those that qualify. These options might include different term lengths from 10 – 30 years and adjustable rate mortgages (ARM’s). Also noteworthy is that FHA loans have loan limits set by area and are typically less than one would find using conventional loans. What this translates to is if someone who is trying to obtain a FHA loan where the mortgage exceeds the limits the only options are to either provide a larger down payment or to acquire a conventional loan.
While there are other differences between the two types of mortgages discussed here, the main points are listed above and can help with the initial decision making process when sitting down with mortgage professionals. Educating yourself is the key to making the right decision when trying to decide the type of loan that makes sense for you.