FHA vs. Conventional Loans: Your Financing Options
Thanks to the Great Recession of 2008, the Housing Bubble of the same time period, and the Dodd-Frank Act, the landscape for home ownership has undergone some drastic changes.
The most often cited issue with the Dodd-Frank Act is focused on the borrower's creditworthiness. Although the paperwork necessary to be filed with regulators increased tremendously for the lender, the most difficult hurdle for the consumer is now the ability to qualify based on creditworthiness. Required scores are the highest in modern mortgage history.
Knowledge is power, and before you make a decision about the financing of your home, you should clearly understand the difference between the many mortgage products offered, and how each mortgage choice could affect your personal situation.
Here is a comparison of two of your basic options for financing your new home: FHA vs. conventional loans.
Conventional Mortgage Loans
As mentioned above, the regulations for mortgages have undergone some changes in the past few years, many of which affected the lender's reporting requirements and the length of time required for approval. Conventional mortgages are no exception.
Qualifications for you, the borrower, became more difficult because of the controversy surrounding predatory lending practices and the Dodd-Frank Act that addressed those concerns. Greater protections were put in place to ensure that consumers fully understood and could comply with mortgage terms. However, with those protections came stricter requirements of eligibility and a longer process for obtaining a mortgage.
Conventional mortgages are offered by many traditional banks, and are often the only option if you're financing through your local institution. Because of the housing bust in 2008, traditional lenders became more conservative in their lending guidelines when it came to appraisals and personal income requirements.
These loans require a down payment of at least 20 percent, with some as high as 30 percent, and may be offered in various forms: fixed rate, variable rate, and a multitude of repayment terms. They typically also require an extremely favorable FICO credit score. The higher down payment is required for conventional loans because there are no government guarantees for the lender. And that brings us to an explanation of a government guaranteed FHA mortgage.
FHA Mortgage Loans
The Federal Housing Authority (FHA) oversees this program under the Department of Housing and Urban Development. In short, the government will guarantee your loan for the lender, provided you meet the FHA requirements.
Down payments are lower, interest rates may be only slightly higher, but you will be required to pay mortgage insurance and this can add significantly to your monthly payment. FHA mortgage loans are available with fixed rates, fixed terms, or varying rates with a combination of fixed or adjusting terms. FHA loans are often the first choice for first-time home buyers because of the low down payment, ease of qualification and government guarantees.
Finding the Right Loan for You
As with any major decision, ensure that you carefully evaluate your current situation, monthly income and budgeting, as well as any anticipated changes to your financial situation in the short term. Also consider your objectives, the market in your area, and the program that best fits your needs. Home ownership is a big step, so make sure you fully understand your options before taking the leap!