Home mortgage: FHA home loan and Conventional loan

While considering different loans that are available in the market to refinance existing loans or purchase for the first time, it could be very confusing. The past year has seen a lot of changes in the guidelines for most of the mortgages that are available. Unlike previously, the FHA seems to have gained a lot of popularity and have become the first choice for prospective home owners. There are many differences that we can come across while studying conventional loans and FHA loans.

FHA is Federal Housing Administration, which is a government agency working for the welfare of the citizens of America. There are lenders across the country, who are approved by FHA. FHA insures loans that are approved by these lenders. FHA thus does not directly extend loans to prospective borrowers. The lenders approved by FHA are protected by insurance provided in the event of defaults on their loans, by the borrower.

Government sponsored enterprises (GSE) like Fannie Mae and Freddie Mac makes sure that the US housing and mortgage market has enough liquidity and provides support and stability to the same. These companies or GSEs also do not directly deal with the borrowers. These companies ensure that the banks and other financial institutions have ample funds to provide loan and mortgages to the people of their respective localities. These loans availed from banks and afore mentioned institutions, are conventional loans.

FHA guidelines for loan application and approval are more lax as compared to conventional loans. The down payment that is required for FHA loans are 3.5%. this amount can be got from any family member as a loan or even a gift since the amount would not be very big. The closing costs are around six percent of price at which the home is purchased. This clause has to be negotiated with the lender and clearly mentioned in the purchase contract. The credit score that is required to avail a FHA loan is 580.

For availing a loan for ninety percent to ninety five percent of the property price. This is mainly due to the lack of private mortgage insurance availability. The seller is allowed to pay only three percent of the purchase price for closing costs of buyer. These should not be towards recurring costs like taxes, insurance or pre paid interests. FHA loan allow payments of both recurring and non recurring costs.

FHA loans allow non occupant co borrower to co sign the loan and the income of both borrower and co borrower are calculated together for qualifying for loan. But in conventional loans a ratio of thirty five percent to forty three percent ratios is approved by the Automated Underwriting System. FHA loans have monthly mortgage insurance with upfront mortgage premium as compared to conventional loans which have only monthly mortgage insurance premium.

Thus both types of loans have their own advantages and disadvantages. Everything is on the discretion of the borrower.