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How an FHA Loan Differs from a Conventional Loan

Home prices have fallen in many places around the country, and for people with stable employment and enough savings, now is a great time to buy a home. If you are in the market to purchase a home, you may have heard about Federal Housing Administration (FHA) loans and conventional mortgage loans. Each of these types of mortgages have pros and cons, and the type of loan that you get depends on your circumstances. By learning about the differences between the two types of mortgages, you will be more informed when you go to the real estate office to apply for a mortgage.

Benefits of FHA Loans

An FHA loan is available to some people who would not qualify for a normal conventional loan. They might qualify for a sub-prime loan on the conventional market, but FHA loans are often a better choice than taking out a sub-prime loan. FHA loans require that the borrower put only 3% down, while many conventional loans require you to put 5% or more down. If your credit is less than stellar, an FHA loan could get you a better rate, as your interest rate is not dependent on your credit score. If you need help with your down payment, you can get money from friends, family, or even non-profit organizations. Conventional mortgage loans won’t allow you to use gifts from friends and family to pay your down payment, unless you are putting at least 5% of your own funds down, or are putting down 20% or more.

Benefits of Conventional Loans

Conventional mortgage loans have benefits over FHA loans in some cases. If you have a large down payment, you may want to go the conventional route. An FHA loan requires you to pay for mortgage insurance up front, and will require you to include mortgage insurance in your monthly payment. Conventional loans also charge mortgage insurance, but the costs are less. When you have enough equity, this insurance requirement will go away. There are also fewer loan requirements with a conventional mortgage than there is with an FHA loan. This allows you to take out larger mortgages, and also allows you to buy properties that don’t meet the standards that the FHA requires. Conventional loans will also take your credit score into consideration when it comes up with your interest rate. While this may hurt you if you have poor credit you’re your credit is excellent, you may be able to save money with the conventional loans.

Which One is Best for You?

Whether conventional mortgage loans or FHA loans are better for you depends on your circumstances. If you need to put down a smaller down payment or are getting help with your down payment from your friends or family, an FHA loan may be the best for you. If your credit needs a little work, you might also save money with an FHA loan. If you are putting down a large down payment, purchasing an expensive home, or have excellent credit, a conventional loan may be your better choice. There are also a few circumstances where you may not qualify for an FHA loan because of a recent bankruptcy, or because you are purchasing a home that does not conform to FHA requirements. In these cases you might also need to go through conventional financing.

National Rate Averages

Mortgage Rates

Product Rate
5/1 yr ARM 3.147%
1 yr ARM 3.299%
15 yr fixed 3.221%
30 yr fixed 3.815%

Home Equity Rates

* Updated Jun 8, 2012