Need a new house but not sure which type of loan to go with? Well, take a look at our guide to FHA Vs. Conventional Loans: Definition And Differences so you can make your decision easier.
This article outlines the advantages and disadvantages of the Federal Housing Administration (FHA) and conventional loans. Before stating to look for your next place to live, take note- this is some information that cannot be ignored.

About FHA Loans
Federal housing administration loans are loans that the united states government insures. The FHA guarantees these mortgage loans, and in case a lender fails to make payments, the government will either purchase or take over the loan.
The FHA program insures mortgages for people with a low-down payment and limited credit history and people who don't have enough work history to qualify for their private mortgage insurance. Therefore, it is generally easier to be eligible for an FHA loan than for a conventional loan.
The FHA will insure loans up to 97% of the property's value, and even loans that exceed the 5% required down payment may be insured for qualifying borrowers. Borrowers can use gift funds from family members and other non-occupancy co-borrowers to reach the required down payment amount.

About Conventional Loans
A conventional loan is a option that is approved by a lender and then sold to investors. Conventional loans are originated by mortgage brokers and lenders who don't use the fha program. These loans are known as closed-end mortgage loans, and the term "conventional" comes from the fact that the loan is not part of a federal housing administration insurance program.
Federal government does not insure or guarantee a conventional mortgages. The lender may be a non-FHA authorized broker that doesn't use their own money to back their loans, which gives them little incentive to fulfill their responsibilities as a lender.
These lenders may be less careful about complying with basic underwriting standards and borrower protections. Like FHA loans, conventional loans also allow borrowers to use gift funds or non-occupancy co-borrowers to help them reach the minimum down payment.

FHA Vs. Conventional Loans Differences
The following are the main differences between FHA and conventional loans:
1. The 5% down payment requirement is not required for FHA loans, whereas it is required for conventional loan borrowers to be eligible for the loan. Borrowers may use gift funds to meet the minimum down payment requirement of 3%. In addition, some programs allow borrowers to make partial down payments, which helps offset the cost of some of their down payments.
2. With FHA loans, there are no credit requirements. The FHA program will insure any mortgage up to 97% of the property's value, so it doesn't matter what credit you have, and you can use gift funds to pay off the remaining 3%. Hence, FHA loans accommodate people with a limited credit history or past credit problems.
3. The amount borrowed and interest rates on both FHA and conventional loan programs are determined by your income, assets, and debt to income ratio. The lending guidelines are similar, and the amount you will be able to borrow is based on your income and other financial responsibilities.
4. Refinancing your FHA loan is easy: lower interest rates and smaller monthly payments will help you reduce your monthly mortgage expense. You can combine your mortgage payment with other monthly fees like a student loan, credit card debt, and other loans. Additionally, the lower payments you make on your FHA loan will help you save money on interest over the life of the loan.
5. Conventional loan borrowers must wait 12 months for a refinance transaction if they have refinanced to lower their interest rate within the past 6 months. Further, if the borrower has paid off property and wants to refinance, the lender will review all information about the previous loan.
6. The total amount of debt your FHA loan and your mortgage/home equity/debt can reach have limits based on your income, assets, and debt to income ratio. You get a loan up to a maximum of 125% of the property's value. Here, your income and financial responsibilities play an important role.
7. As with fha loans, conventional loans have a 3% to 4% down payment requirement. However, because the lenders do not have insurance to back their loans, they may require higher interest rates. Furthermore, mortgage brokers may require larger down payments than the fha requires in some cases.
8. Fha mortgages are not fixed rates; they are adjustable or adjustable-rate. This means that the interest rate is determined based on the current market, and these rates are often lower than those with conventional loans. Additionally, there is no prepayment penalty on FHA loans.
9. Fha loans are assumable, meaning that if the loan is transferred to a new borrower, the previous borrower can still be held responsible for the loan during its entire term. So the FHA will hold the last borrower liable for any money owed on the property, even if that is not the current buyer of the property.
10. Although the FHA insures loans up to 97% of the property's value, with conventional loans, you may only borrow 75%-80% of the appraised value because they are not backed by federal housing administration insurance. Your minimum cred score must be at least 700.

FHA Vs. Conventional Loans: Advantages And Disadvantages
FHA Loans: Advantages
1. The FHA mortgage insurance provides a lower down payment requirement than conventional loans and allows you to use non-occupancy co-borrowers for extra help.
2. You can purchase a home with a FHA loan even if you have been turned down for a conventional mortgage in the past.
3. Fha loans allow you to refinance with no waiting period, and many lenders will allow you to refinance without an appraisal.
4. Fha loans are assumable and don't require a minimum credit score or history of on-time payments to qualify for the program.

Fha Loans: Disadvantages
1. If a borrower defaults on an FHA loan, the federal housing administration must pay the lender for their losses.
2. Higher interest rates: although interest rates for an FHA loan are lower than for a conventional mortgage, the cost of mortgage insurance may drive your total cost of borrowing up further.
3. The FHA loan program sets strict guidelines on the number of loans an individual can have.

Conventional Loans: Advantages
1. The conventional loan is a flexible and powerful option for many people. You have freedom to choose from multiple different types of conventional loans, including fixed-rate and adjustable-rate. In addition, you will also have the option to choose between a 15 year or 30 year fixed period mortgage.
2. With a conventional loan, you won't have as much red tape as with FHA loans, and the approval process is less time-consuming.
3. By being approved for a conventional loan, you will access additional resources and services such as private mortgage insurance that FHA does not offer.
4. Conventional loans often require a minimum credit score of at least 620.
5. Unlike the fha program, the interest rate on a conventional loan is not tied to market rates.
6. There is no prepayment penalty with conventional loans, so you won't have to pay back any money if you refinance your fha loan within the first three years of your contract term.

Conventional Loans: Disadvantages
1. Conventional loans have higher down payment requirements and a longer application process. For this reason, you have to have a good credit score to get approved for them.
2. Conventional loans require an appraisal of the property. This costs you extra fees and may delay your mortgage closing date.
3. Your lender may require you to make a larger down payment than with fha loans.
4. Conventional loans don't have income limits, so they can be more expensive for people with limited income who need a larger loan.

An FHA loan program is a great option for first-time homebuyers who don't have a lot of money saved for the purchase. It is additionally a good choice for people with credit challenges because the income and assets requirements are more flexible than those required by conventional loans.
Are you looking to refinance your house ? The loan process can be extremely confusing if you are not well informed of your options. Fortunately, offers a quick and easy solution for refinancing your home.