FHA Vs Conventional Mortgage Loans
People looking for a home are offered two options in the mortgage
market. They can either choose a conventional loan such as loans
falling under Fannie Mae and Freddie Mac limits or a government
insured loans known as FHA loans.
FHA or Federal Housing
Federal housing administration serves as an umbrella for low and
moderate income people who are not eligible for conventional
mortgage loans. Not meeting the conventional mortgage loan
criteria can be due to bankruptcy, bad credit, no credit or not
having enough money for the down payments and other fees because
of recent marriage or graduation.
FHA operates on self generated budget and not on taxes given by
people. FHA provides mortgage insurance on loans and the proceeds
paid by homebuyers are used to operate this program. This
insurance provides protection against losses incurred by the
lender because of a defaulting home buyer. The government pays for
these damages and this is what makes it easier for mortgage
lenders to provide poor and moderate people a home loan.
of FHA mortgages
FHA 203(b) fixed-rate mortgage (15- or 30-year loans)
This type of FHA loan has the minimum down payment about 3% of
the total cost. It has a fixed interest rate which means you can
get a financing up to 97% and minimum closing costs. This loan is
the only home loan in which the entire 100 percent of closing
costs or down payment can come from a non profit or government
agency and relatives.
2. FHA 251 adjustable-rate mortgage
This type of FHA mortgage keeps the initial interest rate low and
allows home buyers to qualify for a house they need. This program
has several benefits. First they keep your monthly payments low
and secondly the interest rate change is monitored. In a year the
interest rate is not allowed to be increased by 1 percentage point
and the change in rate over the life of loan cannot increase more
then 5 percent.
Conventional Mortgage loans are different than the FHA loans.
These loans are not insured by the government and use the real
estate that you buy as collateral (security) for the loan. In case
you default the lender can sell the house for the repayment.
Conventional loans fall under FNMA and FHLMC lending limits. Many
of these loans require a huge down payment.
This type of conventional loan is the most widely taken choice
but it is very difficult for low and moderate income families to
get these loans. Why? Because a fixed conventional mortgage for
15-30 year requires 20% deposit. The advantage of fixed loan is
that you can keep track of your finances and have to pay a fixed
amount each month with no change in interest rate over the life of
Rate Mortgages (ARM)
Adjustable mortgages have a variable interest rate which increase
or decrease according to the interest rate offered by Prime bank.
In a typical adjustable mortgage, the interest rates are fixed for
the first year or first few years and then they are adjusted by
the lender. This is a good option if you want to get lower
Types of conventional mortgage
conventional mortgages exist in the market which include balloon
mortgage, biweekly mortgages, bridge loans, construction
mortgages, home equity line of credit, interest only mortgages,
jumbo mortgages, refinancing, second mortgages, veteran’s
administration mortgages and 125% mortgages
Conventional mortgages may also have a prepayment penalty which
means you will have to pay a fee if you want to pay the remaining
debt before the loan term is over. Watch out for this fee because
it can .
Much FHA or conventional Loan You can Afford
Most people want to have house that they like but dreams cost
much more than what people can afford. FHA and conventional
mortgages requires a person to qualify according to some set
standards of debt to income ratio so that they get an affordable
loan. Two types of ratios are used.
One is “mortgage payment expense to effective income” in which
total mortgage payment (mortgage principal and interest, property
taxes, and insurance) is divided by your gross monthly income.
This ratio should be 29% for FHA and 33% for a conventional loan.
The second type of ratio is “total fixed payment to effective
income” in which total mortgage payments and other revolving debts
(student loans, car loans) are added up and divided by the gross
monthly income. This ratio has to be 41% for FAH and 36% for
conventional loans before you can qualify.
FHA vs. Conventional Loan
home loans and conventional home loans have several differences
amongst them. First of all the down payment in FHA loans is very
low i.e. 3% where as in conventional loans it can range from 5-20
% of the total loan cost. The FHA closing costs are controlled
which means minimum fees are charged from you whereas in
conventional loans you can be charged with loads of fees. The
origination fee in FHA loans is maximum 1% whereas in conventional
loans there is no limit on this fee.
to relaxed terms the qualifying ratio is higher for FHA loans in
contrast to conventional loans. In FHA loans the seller can also
credit 6% towards buyer closing cost whereas as in conventional
loans the maximum credit towards closing costs of buyer is only
3%. The property you are trying to buy must meet the standard
conditions provided by FHA before it can be bought where as with a
conventional loan you can buy any type of real estate.
There is a 0.5 % mortgage insurance premium charged annually on
FHA loan which is a small disadvantage but it is still lower than
the percentage charged (0.55 to 0.98%) on conventional loans with
a small down payments. The limit of mortgage loan provided by FHA
is lower than the conventional financing.
GUIDELINES for FHA and conventional loans
qualifying conditions for FHA are rather lenient unlike
conventional loans. Although FHA loans don’t require a minimum
income or excellent fico score but to qualify for FHA loans you
still have to fulfill certain conditions.
Your mortgage payments have to be
29% of the gross income.
The bankruptcy should be 2 years
Foreclosure should be 2-3 years
You should have a steady
You should be using 2 lines of
Pattern of payments should be
positive which means most of the payments should be on time with
the exception of few late ones.
Applicants with delinquent federal
debts, student loan and tax liens are not eligible.
Conventional mortgage loans require an applicant to
have good credit, sufficient income, a handsome down payment,
stable job and lower debt to income ratio. People with bad credit
and bankruptcy can qualify for a conventional loan with some extra
effort but the interest rates charged from these people are very
For more Info please click