Comparing FHA Loans to Conventional Mortgages
August 20, 2024
FHA mortgages are quite different from some conventional residential home loan options. If you aren’t sure how FHA loans stack up, keep reading. We’ll explore some of the major differences below.
What are the most significant differences between FHA mortgages and conventional loans?
One key difference is that FHA loans are insured by the Federal Housing Administration, which allows for more lenient credit score requirements. The government’s guarantee makes these loans less risky for the bank than a conventional mortgage without such a guarantee.
Down Payments
FHA loans and conventional mortgages alike permit down payment assistance.
However, borrowers should expect higher FICO score requirements and a decision about the down payment. They may be required to pay 20% down if they don't want mortgage insurance.
FHA loans require mortgage insurance for either 11 years or the loan's lifetime. Borrowers who need a lower down payment and qualify for the 3.5% down FHA loan will potentially save more upfront on the mortgage. However, they also have the option to pay more upfront if they choose.
Down payment assistance, offered by state and local agencies, can help a borrower make that bigger down payment to either avoid mortgage insurance altogether (20% down for conventional mortgages) or have it canceled after 11 years when putting 10% down or more on an FHA loan.
Occupancy Rules
Occupancy is a key rule in the FHA single-family home loan. FHA mortgage loans are not for investment properties and require at least one borrower to occupy the home as their primary residence within 60 days of closing.
FHA mortgages that require construction may have more extended move-in deadline options. Discuss this with your participating FHA lender.
Conventional mortgages may or may not have an occupancy requirement. That’s up to the individual bank.
Early Payoff
FHA loan rules say your lender cannot penalize you for an early mortgage payoff. This means you can sell or refinance the home without a fee before the original loan term is up.
Borrowers who plan to pay off the mortgage early should discuss this with the loan officer to learn the procedures for early payoff. Each financial institution may have its own unique guidelines. Know before you need to submit your final mortgage payment.
Some conventional mortgages charge a fee to pay off your loan early.
Interest Rates
Because the government backs the FHA loan, the lender can offer lower rates to potential borrowers than some conventional mortgages. When researching rates online, note the differences between FHA/VA mortgage loan rates and conventional interest.
Remember that your FICO scores will affect the rate offered, so it’s not safe to assume the rate you see on the lender’s website during a general search will be the same one offered to you when you apply.
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RELATED VIDEOS:
Here's the Scoop on Conventional Loans
When Do You Need a Cosigner?
Analyzing Your Debt Ratio
What are the most significant differences between FHA mortgages and conventional loans?
One key difference is that FHA loans are insured by the Federal Housing Administration, which allows for more lenient credit score requirements. The government’s guarantee makes these loans less risky for the bank than a conventional mortgage without such a guarantee.
Down Payments
FHA loans and conventional mortgages alike permit down payment assistance.
However, borrowers should expect higher FICO score requirements and a decision about the down payment. They may be required to pay 20% down if they don't want mortgage insurance.
FHA loans require mortgage insurance for either 11 years or the loan's lifetime. Borrowers who need a lower down payment and qualify for the 3.5% down FHA loan will potentially save more upfront on the mortgage. However, they also have the option to pay more upfront if they choose.
Down payment assistance, offered by state and local agencies, can help a borrower make that bigger down payment to either avoid mortgage insurance altogether (20% down for conventional mortgages) or have it canceled after 11 years when putting 10% down or more on an FHA loan.
Occupancy Rules
Occupancy is a key rule in the FHA single-family home loan. FHA mortgage loans are not for investment properties and require at least one borrower to occupy the home as their primary residence within 60 days of closing.
FHA mortgages that require construction may have more extended move-in deadline options. Discuss this with your participating FHA lender.
Conventional mortgages may or may not have an occupancy requirement. That’s up to the individual bank.
Early Payoff
FHA loan rules say your lender cannot penalize you for an early mortgage payoff. This means you can sell or refinance the home without a fee before the original loan term is up.
Borrowers who plan to pay off the mortgage early should discuss this with the loan officer to learn the procedures for early payoff. Each financial institution may have its own unique guidelines. Know before you need to submit your final mortgage payment.
Some conventional mortgages charge a fee to pay off your loan early.
Interest Rates
Because the government backs the FHA loan, the lender can offer lower rates to potential borrowers than some conventional mortgages. When researching rates online, note the differences between FHA/VA mortgage loan rates and conventional interest.
Remember that your FICO scores will affect the rate offered, so it’s not safe to assume the rate you see on the lender’s website during a general search will be the same one offered to you when you apply.
------------------------------
RELATED VIDEOS:
Here's the Scoop on Conventional Loans
When Do You Need a Cosigner?
Analyzing Your Debt Ratio
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