August 7, 2017
What are the differences between FHA loans and conventional mortgages? That’s a very good question, and one that has a multi-faceted answer. Borrowers could find that with careful planning, the amount of mortgage debt with an FHA mortgage is lower than with some conventional equivalents.
The most basic difference between FHA mortgages and conventional home loans is that conventional loans are not backed in any way by the United States government, while FHA loans are guaranteed with government funds. This makes FHA loans easier to get since there is less risk to the lender. FHA loans differ from conventional loans in a variety of other ways, as we’ll examine here.
Lower Interest Rates
Interest rates on FHA mortgage loans are lower than conventional mortgages. You can easily verify this by calling a participating lender to ask what the mortgage loan rates are that day for both conventional and FHA loans. The government’s guarantee on FHA mortgages allows your chosen lender to offer lower rates on these home loans. Keep in mind that your FICO scores will affect the interest rates you have access to, so it’s best to discuss your circumstances with the lender to see what rates you may be qualified for.
Interest rates will change daily, but the basic difference in rates when comparing conventional to FHA will be apparent in most cases. There have been a few weeks in the last 10 years where FHA rates and conventional rates (best execution) either overlapped or came close to doing so, but these instances are usually rare and depend on unique circumstances.
Consumer Protections
Conventional mortgage loans are not “all alike” in this area, but when it comes to protecting borrowers from certain penalties and upcharges, FHA mortgage loans have standard protections built-in that are consumer-friendly. For example, you cannot be penalized for paying off your mortgage loan early; FHA mortgage loan rules found in HUD 4000.1 do not allow penalties for overpaying your monthly mortgage amount or paying in full before the full term of the loan expires.
FHA loan rules also require any home to be purchased with an FHA mortgage to have a “remaining economic life” that will last the entire term of the loan. It does a home loan applicant no good to purchase a property that won’t be saleable later on down the line, so this type of consumer protection is designed to safeguard the investment–the home–for the entire duration of the mortgage.
Occupancy Requirements
We cannot speak for “all conventional mortgages” when it comes to occupancy requirements, but borrowers should know that FHA mortgage loans are specifically designed for owner/occupiers. You cannot purchase a home you don’t intend to live in with an FHA mortgage. These loans are not intended for investment properties, or commercial properties where the residential nature of the home takes a back seat to the non-residential uses of the property.
FHA loans do permit borrowers to buy multi-unit property (as many as four units) with the intention of living in one or more of the units but renting out the others. As long as the occupancy rules are satisfied, this is permitted.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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