FHA Mortgages Compared to Conventional Mortgages
FHA Loans Can Be More Predictable
FHA mortgages are subject to lender standards like all mortgages. But FHA loan rules require participating lenders to follow some best practices such as no penalty for early payoff of the loan and the ability to refinance later using an FHA no-credit-check streamline refinance loan option in qualifying circumstances.
FHA loan rules limit certain fee charges, and your lender can’t pass on its own business expenses to the borrower (lender lawyer fees are one example). Your lender or the seller also can’t compel you to buy a home that appraised lower than the asking price.
Conventional loan terms and conditions in these areas will vary depending on the lender, state law, and other variables.
FHA Loan Interest Rates Are More Competitive
Knowing how the FHA loan program works is key to understanding this issue. The federal government offers a guarantee to the lender for issuing the FHA loan, allowing the lender to make a safer loan (for the lender) and offer a lower interest rate as a result.
Conventional loans have no such government guarantee, which is why you see separate interest rate listings for conventional mortgages and for government-backed home loans like the FHA loan program, VA mortgages, and USDA home loans.
Conventional lenders have a higher risk than FHA lenders. Hence the higher rates.
FHA Loans Have More Forgiving Credit Requirements
It’s easy to assume FICO scores are the only criteria to approve or deny a mortgage. FHA loans are more forgiving regarding a borrower’s debt ratio.
Some sources report FHA loan approval with debt ratios near 50%, while conventional lenders may be keen on approving applicants with debt ratios closer to 36%.
FHA Loans May Qualify for Down Payment Help
What do we mean by this? Simply that some state and local down payment assistance programs and affordable housing options may offer you downpayment help with a qualifying mortgage, and FHA purchase loans are often included in that list.
That’s not to say that conventional loans don’t have similar options, but some mortgage options don’t permit downpayment assistance.
Construction loans are one of these. Lenders prefer to approve single-close construction loans for borrowers who can come up with their own down payment on these higher-risk mortgages.
Knowing your options in this area is important if you need such a program. Remember, the FHA does not offer this help. It’s typically offered through state or local agencies.
Disclosures Give Transparency to Borrowers
Understanding the Purpose of Your Mortgage Down Payment
Putting Money Into Your Escrow Account
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