An Overview of FHA and Conventional Housing Loans

Are you planning to buy a home but you do not know where to find good financing

? There are two options available for you. These are FHA loans and conventional housing loans.

A Quick Look at FHA Loans

FHA loans are protected by the Federal Housing Authority. This insures the lender from losses in case a borrower defaults on the loan. This is the reason why FHA loans are considered safe by all lenders. If you get an approval, you will probably get better terms and lower interest rates from your lender. The best part is that the FHA helps borrowers to meet their mortgage obligations through several assistance programs.

You can apply for a loan if you have a credit score of at least 580. At this range, you will be required to make a 3.5 percent down payment on the loan. If you have a much lower credit score, then your down payment will increase up to 10 percent. FHA generally allows borrowers to apply even if they have credit scores below 620. Unfortunately, most lenders today do not follow the practice of the FHA.

Aside from the credit score, you must be free from delinquent rent payments or mortgage for at least one year. In a nutshell, FHA loans have less stringent requirements compared to other home loans.

If you will apply for FHA loans, you should be financing your own primary residence. Once you get an approval, you will have to pay an upfront 2.25 percent for the mortgage premium. With an FHA loan, you will be able to refinance with a greater value up to 97 percent. You can also take advantage of the streamline refinance option which is convenient and easy to obtain.

Commercial Conventional Home Loans

Conventional housing loans are not secured by the government. Lenders impose stricter requirements for these loans because there are many risks attached on them. Conventional home loans have higher interest rates compared to FHA loans. The interest rates are driven by your credit score and other risk factors determined by the lenders.

You need to have an excellent credit score and income record in order to get lower interest rates and competitive terms from conventional creditors. The good news is that you can use these loans even on purchases of investment properties.

The minimum required down payment for conventional loans is higher at 10 percent. To get an approval, your credit score should be at least 660. If you have a higher credit score, then you will certainly get more competitive rates from conventional lenders. Conventional loans do not require upfront mortgage premium payments. Still, you need to pay the monthly mortgage insurance premium if your loan to value ratio is 80 percent. With conventional housing loans, you are also allowed to refinance but it is only 80 percent for cash-out and 95 percent for non-cash-out.

New home buyers can get an FHA loan or a conventional home loan. Both have major advantages and disadvantages. So you need to choose a loan that will provide more benefits and will answer your unique financing needs.

An Overview of FHA and Conventional Housing Loans

By: Rob Blake

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