Should I Get a Conventional Loan or FHA Loan? by Ray Heinson

The Federal Housing Administration, commonly called FHA, is a government division which does not make loans, rather they are in the business of "insuring" your loan in case of default. This is why so lots of lending institutions prefer FHA loans. If you default on your loan, the FHA will buy that loan back from your lending institution. As a result, the bank's chances of loss are minimized greatly.

Questions come up about where does the FHA get the funds to buy back these "bad loans"? When you accept an FHA loan, they are required to pay insurance. The cost is paid at closing of the mortgage taken out x .0175, and monthly insurance of the loan amount x .0005. After it is all said and done on a home purchase of $150,000 at closing, you will need to bring to closing $2,625 ($150,000 x .0175). Every single month, a borrower will be required to pay an additional $75 ($150,000 x .0005). When initially glancing, it may seem to be a substantial amount of funds. However, did you know you are more than likely going to have mortgage insurance on a conventional loan too. What's more is the rate will be much higher with a conventional mortgage.

It wasn't so long ago that applying for an FHA loan was a mistake unless you liked misery! The reason for this was due to more inspections, more fees, the time process to them was delayed, more documentation was required, it became difficult to qualify for, rules for appraisals were not favorable, and more items. Presently, getting an FHA loan has been easier and the extra costs are minimized.

If you realistically do a side by side comparison between the FHA and conventional mortgages, you'll see the advantages of FHA.

The FHA Down Payment is a minimum of 3.5% vs 5% for conventional mortgages.
As outlined earlier, mortgage insurance for a conventional loan is more costlier than with FHA mortgages.

The origination fee charged by mortgage brokers, lenders, and loan officers is restricted to a maximum of 1% while conventional loans are substantially more if they choose to charge more based on the interest rate, credit score, etc.

Credit qualifications for FHA is at 620 while conventioanl mortgages nowadays are around 680. If you have a bankruptcy or foreclosure, a borrower is eligible to apply for a loan in four years (in some cases 5 years) for a conventional loan while with FHA it is down to two and three years respectively.

The debt to income ratios to qualify for an FHA loan are higher which helps more borrowers qualify
than a conventional loan. On FHA loans, the seller can give the buyer credits up to 6% of closing cost while conventional loans are restricted to 3% closing cost credit.

The only major difference for buyers in high costs areas is the FHA has a maximum loan limit. So if you want to purchase a home in an area which has sales prices significantly more than the current FHA loan limit, you will need to come up with more funds down.

Now after reviewing the comparisons above which loan looks better to you?

Ray Heinson is an investor in real estate and suggest these resources for FHA Mortgage Loanss and to find FHA Streamline Mortgage Refinancing from trusted lenders in your area.

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