Home buyers are no longer confined to the conventional 30-year fixed-rate mortgage when figuring out how to finance their home purchase. These days, a many home financing options are available to consumers. One such innovation is the Federal Housing Administration (FHA) Home Loan Programs, which provides a gateway toward homeownership for those who would not otherwise qualify for a conventional mortgage loan.
The Conventional Mortgage and its Benefits
The conventional loan is the standard 30-year, fixed-rate mortgage. Its primary advantage is the predictability of its payments. Conventional loan lenders follow the underwriting guidelines of Fannie Mae and Freddie Mac and, as such, typically require good-to-excellent credit, sufficient income, reliable employment and a down payment of at least 10 percent. Note that the general down payment requirement is about 20 percent, and paying more upfront can significantly help when negotiating loan terms and interest rates. Furthermore, a larger down payment will help build equity faster.
The FHA Mortgage and its Benefits
FHA home loans are guaranteed by the federal government and issued by participating lenders. Unlike conventional home loans, FHA mortgage lenders do not follow the strict underwriting standards of Fannie Mae and Freddie Mac, though will have their own guidelines. Still, this type of loan allows potential homebuyers with lower incomes and credit scores, and even those with past bankruptcies, to have a higher chance of qualifying for a new home loan. Furthermore, FHA mortgages require a lower down payment -- generally about 3.5 percent -- than conventional home loans, and the money used can be borrowed or gifted funds from relatives, charities or nonprofit organizations.
While there is no minimum credit score required to obtain a home loan, the National Association of Mortgage Brokers states that a borrower must possess a minimum score of 620 (out of 800) to qualify for a conventional mortgage. The higher the credit score, the better the loan terms (typically, lower interest rates). For example, research done by the Fair Isaac Corporation states that a minimum score of 760 will qualify a borrower for the best rates available. On the other hand, borrowers with the weakest scores can expect mortgage rates that are at least 4 percentage points higher than those with excellent credit. FHA loan regulations regarding credit scores are much more lax, though borrowers with a credit score lower than 580 will not be able to qualify for the 3.5 percent down payment.
Mortgage insurance is required if the borrower pays a down payment lower than the amount required. For conventional home loans, a down payment of at least 20 percent is typically required. If the borrower fails to submit this amount, then he will have to purchase Private Mortgage Insurance (PMI). Once the borrower is able to pay off the loan balance so that the loan-to-value ratio reaches at least 80 percent, then the PMI can typically be dropped. For FHA loan borrowers, mortgage insurance takes the form of a 1.5 percent upfront fee and a 0.5 percent monthly premium. Like the PMI, mortgage insurance premiums on the FHA loan can cease once certain requirements are met.
- Bankrate: 7 Things to Know about an FHA Loan
- HUD: FHA Mortgage Limits
- Financial Web: More FHA Loan Programs
- myFICO: What’s In Your Credit Report?
- MSN Money: 7 Fast Fixes for Your Credit Score
- Home Loan Learning Center: Qualifying for a Mortgage
- Lending Tree: What to Consider Before You Cosign a Mortgage Loan with a Significant Other
- The Federal Reserve Board: Looking for the Best Mortgage
- Annual Credit Report
Shayne Arcilla has over four years of real estate industry experience and has published in industry journals such as "The Wharton Real Estate Review." She graduated from Penn State with a Bachelor of Science in finance and a minor in economics.