FHA vs. Conventional ??? HELP Anyone?

Can anyone tell me the difference or advantages between an

FHA, or a Conventional Mortgage or viceversa

5 Answers

  • 1 decade ago
    Favorite Answer

    The "loan type" (FHA, VA or Conventional) pertains to how the loan is insured or guaranteed if the borrower defaults on the loan and the loan goes into Foreclosure.

    If the loan goes into Foreclosure, then the property is sold and the proceeds go to the lender. If the lender loses $1000 (for example) because of the Foreclosure, then FHA (Federal Housing Authority) agrees to compensate the lender in the amount that they have lost ($1000 in this case) so that the lender is "made whole." The VA (Veterans Administration) works roughly the same way. Both FHA and VA have limits on the amounts they will reimburse. FHA loans and VA loans are considered "government loans." Because FHA and VA are "on the hook" if the borrower defaults, they have guidelines for underwriting the loan (i.e., they have specific ratios, etc. that the loan must meet). Therefore, these loans are usually tougher to get because they do not have as much flexibility in their guidelines as a "conventional" (non-government) loan has. FHA loans are now considered to be "safe" for investors (as opposed to sub-prime mortgages) because of their stricter guidelines.

    A "conventional" loan is a loan that has "private mortgage insurance" (or "PMI" or "MI") which operates as described above in the case of foreclosure. If a borrower on a conventional loan defaults and the lender forecloses and loses $2000, then the private mortgage insurance company (not a government agency) cuts a check to the lender for $2000 to make the lender "whole." As stated previously, conventional loans generally have more flexible terms than government loans.

    If the amount of your loan is 80% or less than the value of the property, then Mortgage Insurance will not be required at all (because a Loan-to-Value ratio (LTV) is not considered to be very risky to the lender). For example, if the property you want to buy is worth $100,000 and your loan amount is $75,000, then you have an LTV of 75%. If you default on the loan, then it is very unlikely that the value of the property will drop so far that the lender will lose money (which is why MI is not required for a loan with such a low LTV).

    Regarding advantages to you (the borrower), I don't think there would be any advantages either way (other than that a conventional loan could probably be approved and closed more quickly than a government loan). Mortgage Insurance is there for the benefit of the lender; not for the benefit of the borrower. If you're trying to decide on a mortgage loan, I suggest going with the loan that gives you the best loan terms and the best interest rate.

    Make sure you understand the following:

    1. How long is the term of the loan (10 years, 15 years, 30 years, etc.)?

    2. What is the Interest Rate?

    3. Does the Interest Rate adjust or change at any time? (If yes, this is considered an Adjustable Rate Mortgage or ARM. If the IR does not change, it is a "Fixed Rate" loan.)

    4. If the Interest Rate adjusts, when does it adjust (after the third year? second year?) and how much can the Interest Rate go up (or down)?

    5. Are there any "Prepayment Penalties" on the loan? In other words, if you pay off the loan earlier than the original term (which almost everyone does), is there any penalty? (Sometimes there are prepayment penalties only in the first few years of the loan.) If these prepayment penalties exist, do they apply if you pay "additional principal" every month? (For example, if you add an extra $100 with each payment, will you be penalized?)

    Good luck!

  • 1 decade ago

    FHA mortgages are backed by the Federal Housing Administration. At the present time, they require a 3% down payment but you can obtain down payment assistance if the seller agrees to programs such as American Dream. A 30 yr FHA mortgage requires MI (mortgage insurance) regardless of the amount you put down. The rates are good, and with all the changes in the mortgage market the pricing on these loans are better currently than conventional. Many changes happened last week with Fannie Mae and Freddie Mac. A 15 yr FHA mortgage does not require MI if you have 20% down as part of your monthly payment. FHA requires that you escrow your taxes and homeowner's insurance. FHA also allows the seller to pay a portion of your closing costs. Recently the loan limits for FHA has increased depending on where you are buying.

    Conventional loan programs have changed in the last week. Prior there were programs such as MyCommunity and Home Possible that allowed 100% financing. These programs still exist but a 3% down payment is required. If you have a 20% downpayment then conventional would be an advantage if you need a 30 yr loan because it does not require PMI. But, if you borrow more than 80% then you have to pay PMI as a part of your payment. As far as pricing, with the mortgage foreclosure crisis the adjustments for credit scores have changed dramatically with conventional financing. You can avoid the PMI if your lender offers a lender paid mortgage insurance product- the rate will be higher but you will not pay PMI as part of your monthly pymt.

    Both Conventional and FHA offers fixed loan programs and ARMS. Stay away from the ARMS.

  • 1 decade ago

    FHA offers conventional mortgages and you want a conventional mortgage, not an ARM. FHA is a federal underwriting program. You want to pay principal and interest with a fixed rate for 15 or 25 or 30 years. Hopefully you have saved up for the down payment and can put 20% down and avoid the PMI monthly costs.

    No interest only or 100% loans, as that's why there are all these foreclosures.

  • haley
    Lv 4
    4 years ago

    FHA used to be more strict than conventional but that is no longer the case. If a home fails FHA standards it fails conventional standards too. Things like a worn carpet or a cracked window glass no longer require repairs with FHA unless they present safety issues, in which case conventional financing will require them to be fixed as well. With excellent credit, conventional financing will cost less because monthly PMI rates are lower compared to FHA and conventional does not require the one percent upfront mortgage insurance premium. With a credit score below 680 FHA will probably cost less because their PMI is not affected by credit score. The PMI companies will limit your total monthly debt payments to $1386 (45% of your income) which will probably max out your purchase price in the $175-$180K range with 5% down. If you have enough in the bank to be considering 5% down on a $240K purchase you should have enough for a $180K purchase. With 5% down, conventional programs allow the seller to contribute up to 3% of the sale price toward your closing costs. FHA has the 203K Rehab program if you decide to purchase a home and include repairs and/or improvements in one loan. Maximum financing will be a bit lower than conventional since the PMI costs are higher and allowances need to be made for the cost of repairs.

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  • Hugh
    Lv 6
    4 years ago

    For Credit and finance solutions I recommend this site where you can find all the solutions. http://FINANCEANDLOANS.INFO/index.html?src=bjuLpIq...

    RE :FHA vs. Conventional ??? HELP Anyone?

    Can anyone tell me the difference or advantages between an

    FHA, or a Conventional Mortgage or viceversa

    Follow 2 answers

    Source(s): For Credit and finance solutions I recommend this site where you can find all the solutions. http://FINANCEANDLOANS.INFO/index.html?src=bjuLpIq...
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