What is the difference between an FHA loan and a Convetional loan? This is a question many homeowners ask. Many first-time homebuyers obtain FHA financing due to down payment limitations. With an FHA loan you will pay an upfront mortgage insurance premium and you will pay a monthly PMI (private mortgage insurance). With a conventional loan you will also have PMI if you dont put down at least 20%, however, there are many mortgage programs available that you will be able to avoid paying PMI. FHA loans are INSURED by the Federal Housing Administration. A conventional loan is not insured or guaranteed by any government agency. Your mortgage professional should be able to direct you towards the right loan for you.FHA loans increase the number of people eligible to purchase a home. This is because FHA is more lenient regarding qualifying for a purchase after discharging a bankruptcy. FHA will allow a buyer to qualify 2 years after a Chapter 7 bankruptcy is discharged, whereas Conventional financing reuires a 4 year discharge.
Conventional loans are becoming more and more accessible for people with limited or no down payment. Conventional lenders have been coming out with a lot more programs that appeal to this market. Both loan types can provide borrowers with benefits though and your mortgage broker should be able to decide which one is best for your situation.
Conventional loans can be more appealing to sellers, because there is more "red tape" associated with an FHA loan.
Conventional mortgages will also have more options as you have the opportunity to do a stated income mortgage, no doc mortgages or various other types of programs that you might need.
Many sellers stipulate that they will not accept FHA financing from a buyer, on their property, due to the requirements of FHA in regards to appraisals and the "picking" at very minor items that need to be fixed or corrected first before the FHA lender will lend on the loan. Also, FHA loans take considerably longer to close (start to finish), on average, that Conventional loans.
Low lending limits currently make FHA loans impractical for many higher priced markets such as coastal counties in California and east coast suburban neighborhoods.
While FHA loans are good for some borrowers in certain situations, conventional loans simply have many more options. In addition to offering no income loan, no doc. loans, stated income and such loans, conventional also offers the increasingly popular home loan programs such as interst only loans, Pay Option ARM loans and 40 year amortization loan that FHA does not.
FHA insured loans offer better rates and terms to those who qualify with non-traditional credit or with credit scores below 620. If you have a credit score around or below 620, you may want to consider FHA financing before conventional financing.
FHA financing is also available on certain commercial properties, such as those utilized for assisted living or skilled nursing facilities.
FHA has made the appraisal process more simplified recently. There is little reason for a seller to be frightened by an FHA Appraisal anymore.
FHA financing allows for 2-4 unit owner occupied properties to be purchase with as little as 3% down, with no pricing adjustment. Conventional financing is not as aggressive for 2-4 unit owner-occupied properties.
