FHA Versus Conventional Loans

There are many differences between getting an FHA (Federal Housing Administration) loan and choosing to get a conventional loan, and yet at the same time, there are many similarities as well. In the total scheme of things, it is far easier for a potential homeowner to qualify for an FHA loan than it is for them to get rewarded with a conventional loan. An individual’s qualifying standards are put into play when deciding between the two loans. In a nutshell, a 3 to 5% down payment [of the homes asking price] is necessary for an FHA loan — versus — a 5 to 25% down payment when getting a conventional loan. Which one is going to be right for you, is what we would like to outline in assisting you in making the proper decision.

For the majority of potential homeowners, deciding to go with an FHA loan will make the most sense financially. This type of loan is the most flexible when considering a person or family’s assets, how much money they can come up with for the down payment, and what their credit rating is. Because of the versatility of this loan, it is the most widely used (and sometimes the only possibility) loan out there and is used by potential borrowers more often than not. If we calculate a 3% down payment, on a $300,000 house, then we know that you will need to come up with a $9000 initial payment.

For the other folks out there who are able to financially go with a conventional loan, then this type of mortgage loan is not insured by the federal government. This loan would be an asset for a lender’s portfolio, although only until the loan was paid off in full. As stated before, a conventional loan requires at least 5% down and when you think about it, maybe it can be financially done by you. A quick calculation of this would tell me that 5%, of a $300,000 house, is going to be a $15,000 down payment. So, if this is the type of mortgage payment for you, then it will be up to you to decide.

Whether your credit rating is considered really good — anything with a credit score of above 700, or it is considered less than admirable — a credit score of less than 700, the type of loan you will be seeking will have a lot to do with your current credit rating. If you are only able to put down a minimal amount of money then your interest rate is going to suffer and you could be paying out as much as 6 or 7%. One of the not so well known reasons for this is that a conventional loan will have higher interest rates for persons with credit scores that are very low.

What about the source of your down payment? It has been said that this is a critical resource of getting your mortgage loan approved. An FHA loan will enable the loan borrower to use the money given to them and it can be considered a gift from a family member or friend. On the other hand, a conventional loan will require a borrower to have at least 5% — of their own money or assets — to put down on their initial payment. In addition, a conventional loan will require you to get approved for private mortgage insurance (PMI) that you will have to have. If you don’t want to be concerned about this issue than an FHA loan will be the one for you. A great example that is compared here let’s say is; your credit score is under 700 points and you’re only able to put down a minimum 5% with the conventional loan process, then you won’t have enough left over for you to purchase PMI. If we look at the FHA loan process, then we see that the criteria you have to meet, is not filled with the stricter guidelines that the conventional loan will administer to you.

Why don’t we now take a look at potential first-time home buyers between the ages of 22 to 35 years old? This is a growing population of people who are ready to make this big initial purchase and their numbers are somewhere between 12 and 15 million. This sector of folks will seem to lean to an FHA loan, rather than a conventional loan where the process of getting approved is much more difficult because of their circumstances.

In closing out our comparison of FHA loans versus conventional loans, we see that the latter is tougher in many areas for the majority of potential homebuyers. Some of the advantages for FHA loans are; lower down payments, this process can help people to obtain the loan with little or no down payment, a much less stringent credit qualifying applications, and this loan will help to insure less risk for the lender. A great comparison table can be found at http://fha.mortgageloanplace.com/fha_vs_conventional.html.