Conventional Loans Versus FHA Mortgages
What’s the major difference between FHA mortgage loans and conventional loans? Actually there are several, but the first and most basic difference is that an FHA mortgage is guaranteed by the government, where a conventional loan is not.
The government’s backing of an FHA mortgage makes the loan less of a risk to the financial institution offering you a line of credit to purchase your home.
And because the loan is backed by the government, FHA mortgages feature lower down payment requirements than many conventional mortgages. You may find conventional loans requiring 10 or even 20 percent down, where an FHA mortgage for qualified borrowers with FICO scores at 580 or above may qualify for maximum financing. That means a down payment requirement of only 3.5% of the adjusted value of the home.
It’s important to remember that the 580 FICO score is an FHA minimum standard and that lender requirements may apply. Lenders may ask for FICO scores of 620 or higher for maximum financing, and if you have marginal FICO scores your down payment requirement may increase.
FHA home loans do not permit lenders to penalize you for early payoff of your mortgage loan. You also must not be charged to get a final payoff amount or to get information “essential to the payoff” according to HUD 4000.1. FHA lenders may not charge you for “recording the Payoff of the Mortgage in states where recordation is the responsibility of the Mortgagee” according to the same rulebook.
Conventional loans require private mortgage insurance unless your down payment is high enough; FHA loans require a mortgage insurance premium. This is an area where the two are similar.
What’s not similar is that FHA home loans can’t restrict your ability to resell the property as you see fit except for a 90 day restriction when the home is first purchased. This is to prevent “flipping”.
FHA loans are also assumable with the participation of the lender. This means that a borrower can permit another person to “take over” the loan at some point if needed. The lender will need to qualify the person assuming the mortgage, but the original borrower is not restricted from seeking an FHA loan assumption if needed.
FHA and conventional loans may have varying credit standards. An FHA loan, backed by the government, may have more forgiving terms than a conventional loan for the same amount and duration. Much depends on the lender, your financial qualifications, and your individual circumstances.
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