December 13, 2018
What is the advantage of the FHA mortgage loan over conventional mortgages? There are many areas to be aware of when choosing the right mortgage loan to buy your new home with, but your financial priorities will determine a great deal.
If you are looking at buying a new home or refinancing your existing mortgage, FHA and conventional loans have features you should compare.
Especially if you need to save money up front on the mortgage.
Conventional home loans, which you may also hear referred to as agency loans, are mortgages you will get via Fannie Mae or Freddie Mac. Fannie and Freddie are the government-sponsored enterprises that your lender relies on to provide liquidity and stability to the lending market.
Why don’t FHA borrowers choose these loans instead?
Higher credit requirements for one. Those with good credit who do qualify for a conventional home loan will likely compare the 20% down payment “requirement” for conventional mortgages to the 3.5% down requirement for FHA loans and start doing the math.
We put “requirement” in quotes because you are not technically forced to come up with a 20% down payment as a well-qualified borrower, but if you want to avoid paying private mortgage insurance on your conventional mortgage, 20% down is the minimum.
Or you make a smaller down payment and cancel your PMI only when you get 20% equity on the loan.
FHA mortgages do have their own mortgage insurance premiums, but the trade-off is not having to put 20% down. Borrowers who want to save more up front on their mortgages do well to consider the FHA home loan for this reason.
Even if you come up with 10% down on a conventional loan you will still need to pay down the loan by another 10% before you can think about cancelling PMI.
FHA mortgages do have their own mortgage insurance premiums, but the trade-off is not having to put 20% down. Borrowers who want to save more up front on their mortgages do well to consider the FHA home loan for this reason.
Even if you come up with 10% down on a conventional loan you will still need to pay down the loan by another 10% before you can think about cancelling PMI.
FHA mortgages also have a Streamline Refinance option designed to provide a tangible benefit to the borrower in the form of a lower payment, a fixed rate mortgage (from an adjustable rate loan), a lower interest rate, etc.
This option has no FHA-required credit check or appraisal. Ask your loan officer how FHA Streamline Refi loans work and how they can help you save money after your loan has at least six payments made and the loan is at least six months old.
FHA mortgages require occupancy, but for those looking for a home to use as their primary residence there may be many advantages to consider short-term and long-term depending on your financial needs.
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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