What is the difference between FHA and Conventional Loans?

Okay, this is a question I get asked almost weekly, so to continue our discussion on FHA loans, I would like to point out the differences between FHA and conventional loans.

I would like to caution you that shopping Rate is not always the best way to determine which product is the best fit for you. Each mortgage is as individual as the person taking it out, and what works fine for one person, may not be the best for the next, so talk to your mortgage officer in detail to decide what the best fit is for you.

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While many people deciding on a loan product rely exclusively on their lenders recommendation, you should understand the basic difference between an FHA loan and a Conventional Loan. The term Conventional Loan includes all loans under the current FNMA and FHLMC lending limits. Some of these may be called Conforming, A paper, subprime, Alt A, A Minus, BC (bad credit) and other industry names.
Most people that have heard of FHA loans tend to associate them with purchase money transactions. While purchases are the most common use, FHA loans are also available for rate and term refinance loans as well as Cash Out refinances.
The main advantage of a fha vs conventional loan is that the credit qualifying criteria for a borrower are not as strict as conventional loan financing and the down payment or Equity requirements are less. In comparing a purchase money FHA loan against a Conforming or A paper loan, the FHA loan will generally have the least amount of money required to close and the lower payment, see fha vs Conventional loan comparison (pdf file). FHA loans will allow the borrower who has had a few "credit problems" or those without a credit history to buy a home. An FHA Underwriter will require a reasonable explanation of these derogatories, but will approach a person's credit history with common sense credit underwriting. Most notably, borrowers with extenuating circumstances surrounding a bankruptcy that was discharged 2 years ago can be approved for maximum financing. Conventional A Paper financing, on the other hand, would require 4 years to have passed to be eligible for consideration and relies heavily upon credit scoring. If your score is below the minimum standard, you will not qualify or you will be place in a higher rate Subprime, Alt A or A minus loan product.
If a borrower does have past credit issues an FHA loan may be significantly cheaper than an alternative loan such as subprime, ALT A, or A minus. These other programs generally have higher interested rate of require a larger down payment or Equity position. Many of these alternative loan products have Pre Payment penalties where as FHA loan do not have such penalties. In fact FHA loans can be easily refinanced under the Streamline program.
Another advantage of a fha vs conventional loan is that FHA is one of the few home mortgage programs that allow a borrower to have their down payment gifted from a family member, a governmental agency, or non-profit organization. This allows home buyers without the necessary money to buy a home today.
Even though FHA charges an annual renewal mortgage insurance premium of 0.5% of the loan amount, this fee is generally half that charged by low down payment Conforming A Paper conventional mortgages (which range from 0.55% up to .96% per year). Subprime, Alt A and A minus rates range from 0.55% to 4.18%. For a $100,000 mortgage, FHA would charge approximately $41.67 per month and a typical low down (3%) conventional mortgage with a renewal premium of 0.78% would charge $65.00 per month. That's a $280 savings per year.
However, conventional financing does not require an upfront mortgage insurance premium when a borrower closes on the loan. With FHA financing, that fee for a 30 year loan is 1.50% of the loan amount that the borrower can wrap into the mortgage. On a $100,000 for 30 years at 8%, that's an additional $11.01 that the borrower must pay each month. That's almost an additional $132 the borrower must pay each year (fortunately the interest a borrower pays on his or her mortgage on a primary residence is tax deductible).
One drawback to FHA loans is that the loan limits set for FHA loans are typically less than the loan limits for conventional financing in most parts of the country. If a borrower is looking for a mortgage that exceeds the FHA loan limits for the area, the borrower would have to put additional money down on the property or finance under a conventional mortgage, Subprime, Alt A or A Minus product. Under the 2008 stimulus package FHA loan limits have been raised in many areas and FHA offer FHA Jumbo Loans.

Source: http://www.fhainfo.com/fhavsconventional.htm

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Again, I hope this helps in you search for information, I do not claim to be an expert on mortgages, so any questions you have should be addressed to your mortgage broker, loan officer, or bank. Thanks for reading, and as always...

Welcome Home!

Monty Craig, Spoon Real Estate LLC.
http://www.spoonrealestate.com/
812-376-0761

Let's talk about FHA loans!

I attended a seminar last week concerning FHA loans. One interesting fact I learned is that about 30-40% of new loans today are FHA loans. Since this seems to be the way that the market is going, I felt it was reasonable to talk about these type of loans today. The guidelines seem to change quite often, so I will be addressing this topic again in the future as I find new information.

Since this is a big topic with lots of information, I will be spending the next few blogs on this same topic. So please stay with me if this doesn't concern you, we will be moving on to other topics in the near future. Now! Let's proceed...

Legal Disclaimer: I am a realtor, not a mortgage originator, so please use this information as a reference point only. Any questions you may have should be directed to your bank or mortgage broker as FHA guidelines change quite often. Monty Craig, Spoon Real Estate LLC, or any links here in this article are to be held not liable for this content.

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In 1965 the Department of Housing and Urban Development (HUD) was formed. Within HUD operates the Federal Housing Administration (FHA), which has the primary responsibility for administering the government home loan insurance program. This program allows a first time home buyer who might otherwise not qualify for a home loan to obtain one because the risk is removed from the lender by FHA who insures the loan for the lender.
The most popular FHA home loan program for a first time home buyer is by far is the 203(b). This is your standard fixed rate loan for 1-4 family owner occupied houses and only requires a minimum of 3% from the borrower. This loan also permits 100% of their money needed to close to be a gift from a relative, non-profit organization, or government agency.
The main advantage to a FHA home loan is that the credit criteria for a first time borrower are not as strict as Conventional Loans sold to Fannie Mae (FNMA) or Freddie Mac (FHLMC). Someone who may have had a few credit problems or no traditional credit should not have a problem obtaining FHA financing. Also, FHA home loans are assumable, allowing a person to take over the mortgage without the additional cost of obtaining a new loan. In addition, the seller or lender must pay for part of the "traditional" closing costs (called non-allowable costs) while a borrower's allowable costs can partially be wrapped into the loan. The monthly mortgage insurance premium is cheaper for an FHA loan verses a conventional loan with 3% down. Finally, FHA loans may require less income to qualify as they will exceed the Conventional debt ratios of 28/36% as their standard is 29/41%. To learn more about debt ratios, please see the income section.
Many people make the mistake and assume that FHA loans are only available for first time home buyers. This is not true. FHA loans are available to anyone, whether your first or fifth home and can be used to purchase a home or refinance a home. If refinancing a home the current loan DOES NOT have to be an FHA loan.
The greatest disadvantage of FHA home loans is that FHA limits the loan size that a borrower can borrower Please see the link for FHA Loan Limits in your area. Others may try and convince you that the FHA upfront mortgage insurance premium (MIP) is a disadvantage. However this amount makes just a very small increase in the borrower's monthly payment and is partially refundable in certain cases. See the section on MIP refunds for more information.

Edited: for spelling.

Source: http://www.fhainfo.com/whatisanfhaloan.htm


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I hope this helps in you search for information, I do not claim to be an expert on mortgages, so any questions you have should be addressed to your mortgage broker, loan officer, or bank.

Welcome Home!

Monty Craig, Spoon Real Estate LLC.
http://www.spoonrealestate.com/
812-376-0761

Welcome Home!

This is my first attempt at blogging, and while I have a broad idea of what I envision it to become, I will be focusing it more as it grows. It is called Interactive Real Estate for a reason. In today's technological world, gone are the days when people looked for a house to buy in the news paper. Then... you got a minuscule ad with no information about the house, and a poor B&W image the size of a postage stamp to entice you to come see this house! WOW!

Today's buyer has a huge amount of information available to them at the click of a mouse, and they can find out about the locale, school stats, neighborhood attractions, and so much more. So yes folks, I have thrown away the newspaper, and brought my efforts to the web. I find myself also looking to add all kinds of new gadgets to become more accessible to my clients. Hey! It's a great reason to buy new toys, and write them off on my taxes. I can now be reached by cell, email, texting, YIM, and this blog. so if you have a question or comment, post it here and I will attempt to answer it as soon as possible. I look forward to giving great service to my clients, and this is just one more way that I have found to do that.

Thank you for stopping by and taking time out of your busy day to read this. I know your time is valuable, so I will try to make the content on here worth perusing. If you are thinking of visiting Columbus, Indiana, contact me and I will help with any questions you may have concerning our local attractions, and if you are thinking of moving here...

Welcome Home!

Monty Craig, Spoon Real Estate LLC.
http://www.spoonrealestate.com/
812-376-0761