Types of Home Loans: FHA Loan Vs Conventional Loans

FHA Loan Vs Conventional Loans

types of home loansGetting a loan is something about which many people are not educated, but it pays to know the difference between a FHA loan vs. conventional loans. While it is reasonable to rely on the expert recommendations of a lender, it is also important for consumers to be informed. There are a few key differences between FHA and conventional loans.

First, what is meant by the terms “conventional loan” and “FHA loan”? A conventional loan is any loan under the current FNMA and FHLMC lending limits, including conforming, A paper, subprime, Alt A, A Minus, bad credit, and other names. FHA loans are primarily used for purchase money transactions, but are also available for refinance loans. The FHA does not make the loan, but it guarantees it, which limits the risk to the lender.

There are many advantages to an FHA loan:

  • Lower down payment: Because FHA loans are designed to encourage home ownership, most accept a 3 percent down payment, as opposed to the traditional 5 percent.
  • More relaxed qualifying terms:
    • No credit score requirements
    • Qualify two years after bankruptcy
    • Qualify three years after a foreclosure
    • Low closing costs, regulated by HUD
    • Low monthly mortgage insurance
    • Competitive interest rates

types of home loansOn the other hand, there are a few drawbacks to an FHA loan. First, loan limits are typically set lower than for conventional financing. The 2008 stimulus package, however, did increase loan limits in many areas. Further, even though insurance premiums are low, they differ from those of traditional loans, because the premiums are not canceled when the homeowner’s equity reaches a certain level.

Be sure to shop rates if you are looking for an FHA mortgage, because the rates are created by the lender, not the government. Overall, FHA loans are a great way to get into a new house, even if your credit history is not perfect, and you are unable to make a large down payment. Once you are ready to buy a home, check out ClarkWilson Builders. Leading builders in Central Texas since 1986, Clark Wilson offers innovative design in ecologically friendly single-family homes, at reasonable prices. Check them out on Facebook or Twitter, to learn more about this forward thinking homebuilder.


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3 Responses to Types of Home Loans: FHA Loan Vs Conventional Loans

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