Conventional and FHA home loans have been around for a long time. Most likely, both will stay much longer. Even with the recent “mortgage crash,” as Wall Street calls it, both types of mortgage financing are here to stay. In reality, with the mortgage crisis being discussed in every newspaper and on every news channel in the country, FHA loans are starting to become more and more popular.
The FHA, the 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 home loans. The FHA was designed to help potential homeowners own a home for less money and with easier qualification criteria than typical home loans. The FHA is the only government agency that operates without a penny of tax-generated money and operates only on self-generated revenue. Unlike traditional home loans, the FHA does not use credit scores as the primary determining factor in determining whether or not a consumer qualifies for a home loan. Instead, they look deeper into a consumer’s file, payment history, and overall worth 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 strict guidelines when it comes to a property, the condition of the property, and its appraisal requirements. Along with these FHA loans, add what’s 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 rate corresponds to what is known as the mortgage insurance premium. This is different from PMI and MIP is required in all FHA loans, regardless of down payment or home equity. FHA home 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 FHA loans have advantages, there are also some disadvantages.
Conventional loans have also been around for a long time. While the FHA used to own such a large percentage of mortgages with lower credit scores and more lenient income and underwriting guidelines, conventional loans have started to appear with programs to compete with FHA loan products. Fannie Mae, or FNMA, has introduced a My Community loan program that allows as little as no 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 compete with the FHA as well. Conventional loans are more driven by credit scores, assets, compensating factors, loan terms, and other elements. Both of these products are becoming increasingly popular and are an excellent alternative to FHA loans in many situations. These programs allow for the same excellent conventional loan rates, lower credit score requirements than a normal 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 without a 20% down payment, but with some conventional loan products there are ways around the PMI requirements. A MIP is not added to your loan amount on conventional loans like FHA loans, but the PMI on a conventional loan is generally slightly 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 collapse and the upside-down mortgage market right now, FHA loans are becoming increasingly popular. However, I would still recommend that you contact a conventional mortgage lender first to get your mortgage, and if you don’t qualify there, try the FHA route. Neither type of mortgage is a bad decision, and either option can land you on a home with a payment. you can pay it It is a good choice.