FHA Loans vs. Conventional Loans

Sometimes it can be confusing to decide whether you should apply for an FHA loan or a conventional loan. FHA loans are often referred to as loans for first-time homeowners. They come with a lot of paperwork and complexity because they're government-insured. However, borrowers can apply for multiple FHA loans to purchase or refinance a loan. FHA loans cannot be used to purchase second homes or investment properties unless approved by the Jurisdictional HoC.

The paperwork required for FHA loans is not extraneous and almost impossible to detect as a borrower. An additional duty of the appraiser is to identify any safety and health hazards and to require their removal before closing. FHA loans take less time to process than conventional loans.

An FHA loan is a better option because it requires less credit to get financing. In addition, FHA loans require a low downpayment amount. You can also borrow from a relative or non-occupant co-borrower to help you qualify. Blended ratios combine the borrower's income and the non-occupant co-borrower and the monthly payments to make it eligible for the loan. Conventional loans are not available for non-occupant co-borrowers, except with HomeReady mortgages.

FHA loans have several nice features that are not available to conventional loans. FHA loans can be eligible for " streamline refinances," which is a faster and cheaper way to refinance your loan within a short time frame with a low-interest rate. FHA loans are generally more affordable than conventional loans.

FHA loans can also be an assumable loan. This may make it a good point for future resale if the borrower has a low-interest rate on their home. A new buyer can assume the interest rate and balance of the mortgage. This feature is not available with conventional fixed-rate loans.

In certain cases, conventional loans can also be beneficial. You don't have to pay mortgage insurance if you have a 20% down payment to get your loan. FHA loans require an upfront premium as well as a monthly fee. The private mortgage insurance (PMI), which is required to get the loan, can be much lower than the FHA premiums. If your credit score is excellent, it could even be less.

Private mortgage insurance does not require credit checks. It also drops much faster than FHA insurance with lower loan-to-value ratios. Conventional mortgage insurance will cease automatically once the loan has been paid to 78 percent loan-to-value (LTV). FHA premiums would continue to be payable throughout the loan's life if less than 10% downpayment.

Conventional loans are also available to buy investment properties and second homes. In addition, conventional loans can also be used for Jumbo Loans, which are loans that are beyond the statutory limit.

These examples will help you understand the differences between interest rates, monthly payments, mortgage insurance costs, down payments, and mortgage insurance fees for different loan-to-value ratios and FICO scores.

FHA Loan Advantages

• A low down payment is required (minimum 3.5%)

• You can get as low as a 500 credit score (620 minimum in conventional).

• For conventional loans, the limit is a 43 percent debt-to-income ratio. The qualified mortgage rule applies to conventional loans.

• FHA loans can be taken assumably

• FHA loans can be refinanced by "streamline."

• A shorter time frame is required to resolve major credit problems (three years vs. seven years for foreclosure and two years vs. four years for bankruptcy).

• FHA loans usually have a lower interest rate than conventional loans.

• For blending ratios, a non-occupant co-borrower (relative) may be used.

Conventional Loan Advantages

• Minimum 3 percent down payment

• For loans exceeding 80 percent loan to value, mortgage insurance is required. (Mortgage Insurance is required on all FHA loans, regardless of loan-to-value)

• Conventional mortgage insurance only has a monthly or one-time premium. FHA, however, is upfront and monthly.

• Conventional mortgage insurance will automatically terminate at 78 percent loan to value (FHA will remain for the loan's entire term).

• Conventional mortgage insurance does not take into account credit. (For FHA, one premium applies to all).

• Conventional loans are able to cover higher loan amounts (FHA exceeds county limits).

• Conventional loans can have higher interest rates, but their monthly payments might still be lower.