A conventional mortgage with a 10 percent down payment may seem very similar to an FHA loan with the same down payment costs. However, mortgage insurance regulations, qualification requirements and closing costs are just a few variables that differentiate these two types of home financing. Whether you choose an FHA or conventional loan, evaluate your budget thoroughly and consult with a real estate agent before you make your final decision.
FHA Loans
FHA loans, also known as Section 203(b) loans, are insured by the Federal Housing Administration and administered by FHA-approved lenders. Since the loans are 100 percent covered in case of mortgage default, FHA financing offers lower down payment requirements and relatively lenient qualification requirements. FHA loans are common among first-time home buyers and consumers with minimal credit history.
Conventional Loans
Conventional loans are typically offered by banks and credit unions and usually require a down payment of 20 percent of the home purchase price. Buyers can obtain a conventional loan with a down payment of less than 20 percent, but qualifications are much stricter. Although a conventional loan may have tougher credit requirements than FHA loans, if you are in a position to use one, you might find that interest rates are lower.
Mortgage Insurance
Mortgage insurance is an often-misunderstood element of both FHA and conventional loans. You will need to pay private mortgage insurance on a conventional loan if you make less than a 20 percent down payment. This is similar to the mortgage insurance premium required by the FHA. However, as noted at Mortgage Loan Place, PMI costs may be higher than FHA insurance prices. Conventional mortgage lenders are legally required to automatically cancel PMI when homeowners reach 22 percent equity in their home. Borrowers also have the option to cancel the insurance by request once they reach 20 percent equity. These cancellation guidelines are enforced by the 1998 Homeowners Protection Act, which does not apply to FHA loans. As of September 2010, FHA mortgage insurance also required a 2.25 percent upfront closing fee, which is not required for conventional PMI.
Pros and Cons of FHA Loans
In addition to low down payments and lenient credit requirements, FHA loans offer low interest rates and no prepayment penalties. Additionally, an FHA loan initiated before 1986 is assumable, meaning that when the home is sold, the new buyer can simply assume the old loan without going through the qualification process. The FHA also allows the down payment to be borrowed or received as a gift from a relative, friend, employer, charitable organization or government agency. However, FHA loans also have disadvantages. As noted at Financial Web, “Because a seller may be requested to pay fairly heavy costs to assist an FHA buyer, the seller may decide to sell only if his or her full asking price is received.” This can make the process more difficult, expensive and time-consuming. FHA loans also come with additional closing costs, such as a 1 percent origination fee and aforementioned upfront mortgage insurance premium.
Pros and Cons of Conventional Loans
Since conventional loans are offered through private lenders without government restrictions, they may offer more room for negotiation and flexibility. For example, conventional lenders may allow buyers to use a property other than the purchased home for their loan collateral. Financing for personal property, such as home appliances, may also be possible. For those who are struggling to meet closing cost requirements, conventional lenders may offer to increase interest rates and fund a portion of the costs, according to Financial Web. However, in addition to higher down payments, conventional loans may have higher interest rates. Read contracts very carefully, since lenders can include additional clauses (for example, prepayment penalty clauses). Always be sure you know all the terms of your mortgage before signing any paperwork.
FHA Vs. Conventional Financing
A conventional mortgage with a 10 percent down payment may seem very similar to an FHA loan with the same down payment costs. However, mortgage insurance regulations, qualification requirements and closing costs are just a few variables that differentiate these two types of home financing. Whether you choose an FHA or conventional loan, evaluate your budget thoroughly and consult with a real estate agent before you make your final decision.
FHA Loans
FHA loans, also known as Section 203(b) loans, are insured by the Federal Housing Administration and administered by FHA-approved lenders. Since the loans are 100 percent covered in case of mortgage default, FHA financing offers lower down payment requirements and relatively lenient qualification requirements. FHA loans are common among first-time home buyers and consumers with minimal credit history.
Conventional Loans
Conventional loans are typically offered by banks and credit unions and usually require a down payment of 20 percent of the home purchase price. Buyers can obtain a conventional loan with a down payment of less than 20 percent, but qualifications are much stricter. Although a conventional loan may have tougher credit requirements than FHA loans, if you are in a position to use one, you might find that interest rates are lower.
Mortgage Insurance
Mortgage insurance is an often-misunderstood element of both FHA and conventional loans. You will need to pay private mortgage insurance on a conventional loan if you make less than a 20 percent down payment. This is similar to the mortgage insurance premium required by the FHA. However, as noted at Mortgage Loan Place, PMI costs may be higher than FHA insurance prices. Conventional mortgage lenders are legally required to automatically cancel PMI when homeowners reach 22 percent equity in their home. Borrowers also have the option to cancel the insurance by request once they reach 20 percent equity. These cancellation guidelines are enforced by the 1998 Homeowners Protection Act, which does not apply to FHA loans. As of September 2010, FHA mortgage insurance also required a 2.25 percent upfront closing fee, which is not required for conventional PMI.
Pros and Cons of FHA Loans
In addition to low down payments and lenient credit requirements, FHA loans offer low interest rates and no prepayment penalties. Additionally, an FHA loan initiated before 1986 is assumable, meaning that when the home is sold, the new buyer can simply assume the old loan without going through the qualification process. The FHA also allows the down payment to be borrowed or received as a gift from a relative, friend, employer, charitable organization or government agency. However, FHA loans also have disadvantages. As noted at Financial Web, “Because a seller may be requested to pay fairly heavy costs to assist an FHA buyer, the seller may decide to sell only if his or her full asking price is received.” This can make the process more difficult, expensive and time-consuming. FHA loans also come with additional closing costs, such as a 1 percent origination fee and aforementioned upfront mortgage insurance premium.
Pros and Cons of Conventional Loans
Since conventional loans are offered through private lenders without government restrictions, they may offer more room for negotiation and flexibility. For example, conventional lenders may allow buyers to use a property other than the purchased home for their loan collateral. Financing for personal property, such as home appliances, may also be possible. For those who are struggling to meet closing cost requirements, conventional lenders may offer to increase interest rates and fund a portion of the costs, according to Financial Web. However, in addition to higher down payments, conventional loans may have higher interest rates. Read contracts very carefully, since lenders can include additional clauses (for example, prepayment penalty clauses). Always be sure you know all the terms of your mortgage before signing any paperwork.