If you’re just beginning to tread the waters of home financing, you’re likely feeling a little overwhelmed at all the different options available. How do you determine which one is right for you? Sure, FHA loans sound great – but what about conventional mortgages? What exactly are the differences between these two popular home loan choices?
In this post, we will explain some of the major differences between FHA home loans and conventional home loans. After reviewing the information, you may find that one option is better suited to your individual situation. If you’re still not sure which is best for you and your family, don’t hesitate to contact a reputable mortgage consultant for further guidance.
What is an FHA Loan?
FHA stands for Federal Housing Administration, which is a government agency that came into existence with the sole purpose of stimulating??home-ownership.
Does the FHA provide the loan?
No. The FHA does not actually provide the loan to the consumer. Instead, the FHA works with select mortgage lenders across the country, offering to back up the loan in case the borrower defaults. Essentially, the FHA insures, or guarantees, the loan – you still have to go through a lender to obtain it.
Are FHA loans cheaper?
FHA loans typically carry lower interest rates, which can make them a more affordable choice for home buyers. Additionally, FHA loans do not require the typical 20 percent down payment that conventional loans require. Instead, qualified borrowers can opt to pay only 3.5 percent for their down payment.
Why do FHA loans have lower interest rates?
Since the FHA insures the loan against default, i.e. protects the bank from borrowers who do not pay, there is a reduced risk for lenders. In other words, if you do not make your mortgage payments, the lender will most likely get most of its money back from the FHA. Since there is less risk for loss, the lender is able to offer a lower interest rate.
So does that mean I don’t have to pay my mortgage?
NO. Just because the loan is insured by the FHA does not give you the right to default on the loan. If you do not make your payments, you could still be subject to short sale, foreclosure, and any other financial obligations associated with the home. The FHA simply protects the LENDER from loss.
What makes the FHA loan different from conventional mortgages?
As we’ve already touched on, conventional mortgages typically require at least a 20 percent down payment, otherwise the borrower will have to pay private mortgage insurance (PMI). With an FHA loan, borrowers do not have to have PMI. Instead, they will pay a mortgage insurance premium for the FHA guarantee. With PMI, the borrower can cancel the premium after they have the equivalent of 20 percent of the loan amount in equity. Unfortunately, with FHA loans, the premium cannot be canceled once the borrower reaches a certain level of equity. This is the biggest drawback to FHA loans.
Another difference involves the source of the down payment. With an FHA loan, 100 percent of the money needed at closing is permitted to be a gift from a relative, nonprofit organization or government agency. With conventional mortgages such as 30 year fixed rate loans, the down payment usually cannot be “gifted.”
If you have any additional questions about the differences between conventional and FHA mortgages, your best bet is to schedule a free consultation with a loan specialist. He or she can offer personalized advice based on your situation. Kelly Decker and his team are experienced mortgage lenders offering both conventional and FHA mortgages – give them a call today to learn which is best for you: (972) 591-3097.
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Conventional loans and FHA loans have been the backbone of the mortgage market since quite a lot of time. Both the loans have their own advantages and disadvantages. The conventional loans are given mainly by banks, financial institutions or credit unions. On the other hand, FHA loans are actually insured by Federal Housing Administration. In case of FHA loans, even if the borrower defaults the loan, the FHA will help the lender recover his/her dues. Normally, first time homebuyers are advised to go for FHA loans. The rates are other requirements on FHA loans are comparatively lower than the conventional loans.