FHA Loans vs Conventional Loans

August 11, 2010

The recent mortgage market crisis and tightening in the credit market has resulted in an increasing interest in FHA loans. Prior to the financial crisis, FHA loans, with their required down payments and limits on loan amounts, were somewhat unpopular. Now, though, with mortgages increasingly difficult to come by, FHA loan requirements seem a little more reasonable than what is being imposed by other mortgage lenders. In some cases, you might find that a FHA loan works well for you.

What is a FHA Loan?

The Federal Housing Administration offers to insure loans made by certain lenders. The FHA itself does not offer loans, but approved FHA lenders can lend you money and have the loan guaranteed by the government agency so that the lender receives money if you default on the loan.  With a typical conventional loan, if your down payment is less than 20% the bank requires you to buy private mortgage insurance.

FHA Loan Advantages

In the current real estate market, there are a number of advantages associated with FHA home loans. First of all, the down payment for buying a house is often lower; you are only required to make a 3.5% down payment. Right now, many lenders working with conventional loans prefer a down payment of at least 5%, and some are requiring 10% or more. FHA lenders might be more flexible, since the money they advance is guaranteed by the government.

Another advantage is that you can get approved even if your credit is not as good as some lenders would like. While your FHA mortgage rates may be a little higher than if you had good credit, you can still at least be approved for a mortgage that you may not get with a more conventional mortgage.

FHA loans are often ideal for first time home buyers with little credit history and small resources for a big down payment. Another benefit to first time home buyers is that there are no income limits, something that often exists with special first time home buyer programs. Nearly anyone can benefit from a FHA loan, and FHA approval can be a little less onerous than trying to get approved for a conventional loan.

FHA Loan Drawbacks

Like all financial products and services, FHA loans aren’t for everyone. In some cases, conventional loans might be more flexible. There are FHA limits on how much you can borrow for your purchase. Limits vary according to real estate market, but these limits mean that you may not be able to buy the home you want using a FHA loan.

Another issue to consider is that there are FHA loan requirements associated with insurance. Since the government is guaranteeing your home loan, you will need to pay for insurance. FHA loans require an upfront premium, as well as a monthly fee. Once you reach a loan to value ratio of 78% on 30 year loans, the monthly fee stops.

However, there are cases in which the insurance premiums paid for a FHA loan actually ends up being more expensive than private mortgage insurance (PMI), which does not usually charge an up front premium in addition to a monthly fee. Additionally, you can cancel PMI when the loan to value ratio reaches 80%, instead of waiting longer.

Bottom line: FHA loans can be great tools for those who are looking to buy a home in the current real estate and credit market. While almost anyone is eligible for a FHA loan, some of the requirements can scare off would-be home buyers, and there are limitations to what can be bought with a FHA loan.  If you’re thinking about buying a house it might be worth it to look into an FHA loan and compare it to the financing you could qualify for with a conventional loan.

Last updated by .

Miranda

Will this article help you save or earn more money? Get others like it simply by entering your email address below. Your email is used only for delivering daily money tips and you can opt out of delivery at any time. Click here to see all your free subscription options.

  

Miranda
Miranda writes about personal finance almost every day. An experienced freelance writer, she's covered your money online and in print from every angle and is always looking for new ones.

All posts by

Related Articles

Comments

7 Responses to FHA Loans vs Conventional Loans

  • Mark

    I think FHA loans are really useful for people, in FHA loans you get money in some time that is really very good in trouble, so you don’t need to wait much for the money.

Trackbacks/Pingbacks

  • Home Equity Loans vs Home Equity Lines of Credit | Money Smart Life
  • Home Buyers Guide | Money Smart Life
  • Get Here September
  • My First Job Ended in Unemployment
  • Friday Finance Findings for August 13th
  • Tweets that mention FHA Loans vs Conventional Loans | Money Smart Life -- Topsy.com

Leave a Reply

Your email address will not be published.

You may use these HTML tags and attributes: <a href="" title="" rel=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>