FHA vs. Conventional Mortgages- what’s the difference?
When you turn on the TV and listen to the radio, you are bombarded with mortgage advertisements. With so much information being directed at you, you are probably wondering – what does this all mean? And what exactly is the difference between the two main types of loans – Conventional and FHA?
A conventional loan is not guaranteed by a government agency but does comply with the guidelines of either Fannie Mae or Freddie Mac. Conventional loans are ultimately “sold” and the compliance with the Fannie and Freddie guidelines enables this transaction. Generally a 20% down payment is strongly advised, as this will allow the borrower to avoid mortgage insurance. However, if less than 20% is put down, the mortgage insurance would be at a lower rate than the FHA loan.
An FHA loan is guaranteed by the U.S. Federal Housing Administration. Due to this “backing” by the government, the qualifying criteria are more flexible than conventional. These loans are popular with first-time homebuyers, as the minimum required down payment is only 3.5%. If an individual has not build up a substantial amount of credit or has an issue with their credit, this is also a viable option for them. Mortgage insurance is the primary defining element in the FHA loan. The first installment of this mortgage insurance is paid at the closing. The future insurance payments will accompany your monthly mortgage.
Pros and Cons
Conventional Mortgages are easier to process and build home equity faster. This type of loan can be an excellent choice for borrowers that have a good credit score and a 20% down payment. If mortgage insurance was required at the time of purchase, it will be eliminated when the equity in the home reaches 20%.
FHA loans focus on the overall credit picture vs. the credit score alone. The lower down payment combined with a lower minimum credit score requirement are definitely pros. The added mortgage insurance can be a definite con for a home buyer as it increases the monthly payment.