What is the difference between FHA vs. Conventional Financing?

Question

I'm trying to buy a house for the first time and i'm totally lotst.

Which one should i go with?

Answer 1

FHA was created by the Federal Government to provide affordable housing financing for qualified borrowers. FHA insures 100% of the loan, eliminating the lender's risk. The borrower pays an upfront insurance premium which is approximately 1.5% of the loan amount. This money can be financed directly in the loan amount. The borrower also pays a monthly premium of .5% of the loan amount divided by 12 months. FHA requires a minimum down payment of 3%. This money can be a gift. No reserves are required. Closing costs can be financed in the loan amount.

Borrowers must provide proof of sufficient income to show ability to pay the mortgage. FHA guidelines are more relaxed, such as; a bankruptcy that was discharged at least 2 years ago, the use of alternative credit (utilities, cable TV, auto or medical insurance premiums, child care, school tuition, furniture or appliance store accounts) in lieu of traditional credit, and higher debt to income ratios. FHA interest rates are extremely competitive with conventional rates.

Fannie Mae loans are conventional loans made at the risk of the lender without benefit of any government guarantee or government insurance. A conventional loan with an LTV (loan to value ratio) of greater than 80% requires private mortgage insurance, which can be paid monthly. The borrower must have 5% of his/her own funds for the down payment and 2 months reserves on deposit. Closing costs must be paid by the borrower.

Requirements of a conventional loan applicant include excellent credit, job stability with sufficient income, a sizable down payment (usually no gift funds allowed), and low debt to income ratios. Borrowers who meet Fannie Mae guidelines are rewarded with an interest rate only slightly lower than an FHA interest rate.

Answer 2

Please do not listen to the post by financing_loans. He is wrong. First of all Fannie mae and freddie mac both allow for 100% financing, and higher assuming seller concessions. And the industry does not reconize FHA as conventional. Conventional simply means a Non-Government loan. And he is wrong about the debt to income ratio also. FHA is the only one who does cap it. Fannie mae and Freddie Mac loans are ALL run through a computer module, and I have seen loans get accepted with ratios in the 70's and 80's (it depends on everything else.) So clearly the higher thresholdhold for ratio's is NOT fha. And also, FHA has been known to do loans on a make sense basis with the right underwriter. I have seen horrible credit scores get approved for fha financing. So please contact a lender with some knowledge, and whatever you do, do not listen to finance_man. he was wrong on several of his points.

Answer 3

Congratulations for stepping into home ownership.

One disadvantage that I have found with FHA is that they are more restrictive on what they will loan on, where other mortgages don't require GFIC outlets and such. But FHA is great for people with low downpayments and decent credit, especially first time home buyers.

This probably isn't the venue to ask what loan is better for you. This is a discussion you need to be having with your mortgage lender.

If you are totally lost, you have the wrong lender. You need to be working with someone who will explain everything in terms you understand. And has the patience to talk you through the process.

This is one of the most important investments you will ever make, take a step back and regroup. You need to have 100% confidence that you are making the right decision for you and your future.

Good luck!

Answer 4

There is no difference.

FHA is a conventional product, so is VA so is Fannie Mae, and Freddie Mac.

It depends on who insures the loan. Mortgage insurance is taken out by lenders. FHA, VA, Fannie Mae, Freddie Mac guaruantee that the person that buys mortgage back securities will never lose money. They are all basically insurance companies. FHA, VA are ran by the goverment, fannie mae and freddie mac are private but their ceos are appointed by the gov.

They are all conventional. Their programs vary. FHA lets you do 97% loan to value. VA is 100% Fannie mae and freddie mac are 97%.

Fha has a higher threshold for debt ratio then Fannie Mae or Freddie mac. They are all different but they are all conventional loans. I did a loan that wouldnt go FHA because of the Debt ratio. VA doesnt have one.

A skilled loan officer will know where to put your loan, FHA, VA, Fannie mae, freddie mac etc. Ask your loan officer officer one *question are you running me LP or DU?* If the loan officer cant answer that.... find another one.

Answer 5

FHA Insures a part of the mortgage loan for your lender. That means that if you default, lender forcloses and property doesn't sell for enough to pay off the mortgage, FHA will make up the difference. FHA insures only Full Doc Loans and you may be able to get a slightly better rate.

Answer 6

FHA is government insurance on the mortgage. It costs you more money, maybe $2,000 up front and you usually have to pay a higher interest rate. If you have 20% for a down payment, get a conventional mortgage, and you won't have to buy mortgage insurance.