FHA and Conventional mortgage loans have both been around for a long time. They will most likely both be around for a lot longer as well. Even with the recent "mortgage meltdown" as Wall Street is calling it, both types of mortgage financing are here to stay. Actually, with the mortgage crisis that is being discussed in every newspaper and on every news channel in the nation, FHA loans are beginning to become increasingly popular again.
The FHA, Federal Housing Administration, has been insuring properties since it was established in 1934. FHA tends to be more lenient when it comes to credit, credit scores, calculating income and certain underwriting guidelines than conventional mortgage lending. FHA was designed to assist potential homeowners with owning a home for less money and easier qualify criteria than typical mortgage loans. FHA is the only government agency that operates without a dime of money generated from taxes and operates from self-generated income alone. Unlike traditional mortgage lending, FHA does not use credit scores as a main determining factor as to whether a consumer qualifies for a home mortgage loan or not. Instead, they look down deeper into a consumer's file, payment history and their overall worthiness as a borrower. FHA interest rates are generally very similar to conventional mortgage loan interest rates and qualifying is generally much simpler. So why doesn't everybody just get an FHA loan since they sound so wonderful? Well FHA loans do have stricter guidelines when it comes to a property, the condition of the property, and their appraisal requirements. Along with this FHA loans add what is called an MIP fee on top of your loan amount which is 1.5% of the loan amount.
Thus if you were buying a home for 100,000 you would actually be borrowing 101,500. This fee is for what is known as Mortgage Insurance Premium. This is different than PMI and the MIP is required on all FHA loans, regardless of down payment or equity in the home. FHA mortgage loans also require a monthly mortgage insurance premium which is included in your monthly payment for all loans that do not have at least 20% equity or a 20% down payment made. Therefore, while there are advantages to FHA loans, there are also some disadvantages to.
Conventional loans have been around for a long time as well. While FHA used to own such a large percentage of mortgages with lower credit scores and more lenient income and underwriting guidelines, conventional loans have started coming out with programs to compete with FHA loan products. Fannie Mae, or FNMA, has come out with a My Community loan program that allows for as little as no down payment and has much less restrictions when it comes to credit and credit scores. Freddie Mac, or FHLMC, has also come out with a product of their own which is called Home Possible to compete with FHA as well. Conventional loans are more driven by credit scores, assets, compensating factors, loan terms and other items. Both of these products are becoming increasingly popular and a great alternative to FHA loans in many situations. These programs allow for the same great conventional loan rates, lower credit score requirements than a normal conventional loan, and the ease and quickness of the conventional loan process from start to finish. Conventional loans will also require the use of PMI for mortgages without a 20% down payment as well, but with some conventional loan products there are ways around the PMI requirements. There is no MIP added to your loan amount on conventional loans like there are with FHA loans, but the PMI on a conventional loan is generally a little higher than the monthly MI on an FHA loan.
Therefore, both types of mortgage programs, FHA and Conventional, have their pros and cons and they both provide a quality mortgage product for qualified consumers. Some situations will call for an FHA loan and with the recent subprime meltdown and the topsy-turvy mortgage market right now, FHA loans are becoming more and more popular. However, I would still recommend contacting a conventional mortgage lender first to obtain your mortgage from and if you do not qualify there, then try the FHA route. Neither type of mortgage is a bad decision and whichever option can get you into a home at a payment you can afford is a good choice.
by David Zwierecki
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