March 24, 2023
If you aren’t sure whether to apply for an FHA loan or a conventional mortgage to purchase or refinance your home, there are some comparisons you can make between FHA and conventional loans.
For some, 2023 is a year to make the jump from renting to owning, and if you are thinking about your options, it’s crucial to make informed choices.
Don’t pull the trigger on a new loan application without comparing the features of different types of mortgage loans, government-backed and conventional.
Even if you decide not to choose an FHA mortgage in the end, making the most informed decision you can is paramount.
Down Payments
The mortgages with the lowest down payments are USDA loans and VA mortgages, which both feature a zero down option. Some conventional loan equivalents exist; Fannie/Freddie offer a “Conventional 97” loan option.
Conventional 97 loans are advertised with a lower down payment for this conventional mortgage. These loans require three percent down compared to the 3.5% down required for FHA mortgages, but there are some rules to be aware of with that three percent down option.
Conventional 97 mortgages permit the purchase a single-unit home–compare that to FHA loans which allow you to buy a home with as many as four living units.
Also, the Conventional 97 mortgage has a limitation on the size of the loan you can get, even in a high-cost market. Unlike FHA mortgages which have loan limits for typical housing markets but also high-cost and low-cost markets.
Compare the cap on those loans to the FHA loan limits in your area. You may be surprised at how much loan you can qualify for in the FHA mortgage program.
Streamline Refinancing
FHA mortgages feature an option that borrowers can use to refinance. The FHA Streamline Refinance loan is for existing FHA mortgages only and features no FHA-required credit check or appraisal.
FHA Home Loans Are Assumable
Yes, FHA home loans are assumable as long as you have the cooperation of the loan servicer. Some borrowers may be tempted to purchase a home with this specific idea in mind.
In such cases, the buyer may want to transfer the property to a relative or friend at some point later on, and FHA loan rules permit this as long as certain guidelines are met.
Government-Backed FHA Loans Have An Advantage
In a time of crisis–a natural disaster, pandemic,etc.–the federal government issues guidance to participating FHA, VA and USDA lenders requiring foreclosure avoidance, offering mortgage relief, and in some cases, the ability to delay or suspend payments with the approval of the FHA/HUD, VA, USDA, etc.
Conventional lenders have no government mandates to provide more options, loan forbearance or foreclosure avoidance measures. Your options under an FHA home loan may be better in some cases than those associated with a conventional lender, depending on circumstances.
It helps to ask a conventional lender what options are provided in case of a natural disaster, pandemic, etc.
FHA Mortgage Payoff Rules
Borrowers who refinance or pay off their mortgage early by paying extra each month or doubling down on payments at some point should know that certain mortgages may subject you to a financial penalty for doing so.
Your loan may also have a different procedure for making the final payment–be sure to know before you choose your home loan or refinance loan. FHA mortgages and refinance loans feature no penalty for early payoff of the note.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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