July 8, 2016
Here’s the Scoop on Conventional Loans from FHA.com on Vimeo.
What are the differences between FHA home loans and conventional loans? There are several, some features of mortgage loans can vary depending on the lender, and state law may also affect how your home loan is handled depending on circumstances, but there are a few very important general differences to keep in mind when comparing FHA loans to conventional loans.
The first difference is the basic nature of the loan itself. Conventional loans are not backed by the government, unlike FHA home loans where the FHA guarantees a portion of the loan to make it more attractive to the lender to issue credit.
In the event that a borrower defaults on an FHA loan, the lender and the FHA have an arrangement to compensate the lender for a portion of the loss. That’s what allows the lender to offer more lenient credit terms and lower down payment requirements for FHA mortgages.
The down payment on FHA loans is often substantially lower than with conventional mortgages. FHA loan minimum down payments are 3.5% of the adjusted price of the property. Compare that with conventional mortgages that require 10% or more as a down payment and it’s easy to see how different your experience with an FHA mortgage loan could be depending in circumstances.
Interest rates can also vary more between FHA loans and conventional ones. FHA loans have traditionally offered lower interest rates. From time to time, when rates drop substantially you may find some cases where a conventional loan appears to have a similar interest rate to an FHA mortgage, but most of the time FHA rates are lower.
Remember that FICO scores and other financial qualifications determine your access to the most competitive interest rates; if your FICO scores are lower chances are good you may be offered a higher rate for a conventional loan or an FHA mortgage, but you may still find that FHA rates offered in these cases are at least competitive with the conventional equivalents.
One very important difference in FHA loans is that a borrower cannot be penalized for the early payoff of the mortgage. According to the FHA/HUD official site, “FHAs rule, Handling Prepayments: Eliminating Post-Payment Interest Charges, applies for FHA-insured mortgages closed on or after January 21, 2015.”
“This rule explicitly prohibits lenders from charging borrowers post settlement interest, which is broadly defined as a prepayment penalty by the Consumer Financial Protection Bureau (CFPB), for all FHA Single Family mortgage products and programs.”
FHA loans also have the following list of prohibited fees and charges associated with getting the payoff amount for your loan-you cannot be charged for:
–preparing and providing evidence of Payoff, Reconveyance, or termination of the Mortgage;
–providing information essential to the Payoff;
–recording the Payoff of the Mortgage in states where recordation is the responsibility of the Mortgagee
It is always a good idea to compare interest rates, terms, and other details of a mortgage loan between lenders to see who has the most competitive interest rates and most favorable-to-the-borrower terms. In doing so you may find FHA mortgage loans to offer quite a lot to the borrower who wants lower interest rates and a lower down payment requirement.
Do you work in residential real estate? You should know about the free tool offered by FHA.com. It is designed especially for real estate websites; a widget that displays FHA loan limits for the counties serviced by those sites. It is simple to spend a few seconds customizing the state, counties, and widget size for the tool; you can copy the code and paste it into your website with ease. Get yours today:
http://www.fha.com/fha_loan_limits_widget
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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