When you shop for a home you have the option to get a loan through hundreds of lenders.Typically these lenders are separated into two groups. The first is the Federal Housing Administration group of lenders. These are the lending institutions and have been approved to be a part of the federal housing program. The second type of lender is your conventional lender, or those lenders who do not work with the federal program and are therefore not insured by them. There are things about both types of loan – conventional and Federal – that appeal to the homeowner. But how do you know if you’re getting the best one, unless you compare conventional vs. FHA loans?
Conventional vs. FHA – the Pros of the Federally Insured Loan
We’ll start with the federally insured loans because these are the loans that most people gravitate toward if their finances are in need of improvement. This is the first and biggest pro of the federally insured lenders. They are willing to work with people who have lower credit scores or who have bankruptcy on their financial record. This reason alone makes them very appealing to potential buyers.
Another pro that slides in favor of the federally insured loan is the down payment. Because they are there to get you into a home, the down payment can be as low as 3.5% of the value of the home. This is significantly less than some of the conventional lenders. Now bear in mind that this does mean your loan will be for a higher amount, so over time you will end up paying more interest. However, if the amount needed to pay down is stopping you from getting your home with a conventional loan, this pro can ease that burden up a bit. Another little perk in regards to this payment is that you can have it paid through a variety of different sources, such as a family member or a charity, which means you don’t necessarily have to come up with it yourself. This is very attractive to homeowners.
A few other pros in favor of the federally insured loan are the interest rates, which are often lower, the fact that you can qualify with a higher debt to income ratio, and the closing costs, which can be rolled into the loan meaning you don’t always have to pay those up front. In terms of the immediate financial burden, when comparing conventional vs. FHA loans, the federally insured loans look pretty good.
Cons of the Federally Back Loan
When looking at the con of the federally backed loan, the conventional loan may start to look pretty good. The first con you’ll find when you compare conventional vs. FHA loans is the private mortgage insurance. While all mortgages require this insurance initially, you typically end up paying a higher premium for a federally backed loan, simply because you are a higher risk. This will be a long term hit to your finances, so you want to make sure you take that into account. Another downfall to the federally insured loan is that the home has to be owner occupied. This is fine if you intend to purchase the home and move right in, but if you’re looking for an investment property, you’ll probably need to look elsewhere for financing. Federally insured loans are there to get people into a home, not so much to open up opportunities for investors.
A couple of other cons with a loan through the federal program are the loan limits and the lender fees. The loan limits are really only a con if you’re looking to purchase an expensive property. Most people won’t find this a problem. The Federal Housing Administration was created to help people with low or average incomes get into a home, so the limits have been set for this purpose. That being said, the limit does change per area depending on the value of the homes surrounding it. The lender fees are another mark against the federally insured loan. When you buy a home you will always have lender fees. When you’re purchasing through the federal program, if the lenders fees exceed the amount that the program is willing to pay, you will have to take on those costs yourself.
When you compare conventional vs. FHA loans, you’re going to find that things from both loans appeal to you. Determining which loan is going to work best for you will boil down to discussions between you, your agent, and your lender. However, if you do your homework before hand, you’ll have a better idea of what you’ll be looking at in a mortgage regardless of the type of loan you choose.