FHA Loan Requirements - What is FHA Loan

The current events seem to tell us that this is not the right time for us to get a loan to build our dream home. But that should not be the case. We should not be discouraged as long as we have been properly informed with our choices and our options on where to get our loans. To help you with your discernment, let me tell and compare you on two of the most commonly known loans that are being used: conventional loans vs. FHA loans.

For the past few years, most people are leaving out conventional loans vs. FHA loans. FHA is a lot more popular than the latter. But why is that? Let us enumerate the differences between the two.

Conventional loans are usually given by private lenders such as banks or mortgage companies. But such loans are usually imposed high interest rates by these companies. But to enable these companies to lend loans to home owners and buyers at much affordable rates, the US government created the Fannie Mae and Freddie Mac. These are called GSE or government sponsored enterprises and are funded with federal money that they would be lending to these private institutions to ensure stability and liquidity in the mortgage and housing market.

The guidelines of conventional loans vs. FHA loans are a lot stricter. FHA would only require the borrower to pay a 3.5% minimum down payment whereas private lenders giving out conventional loans require a borrower to pay a minimum down payment ranging from 5 to 10 percent.

For FHA loans, most lenders would allow a minimum credit score of 580 but for conventional loans, they require their borrowers to have at least a credit score of 720. This is because there are only a few private insurers available to insure these conventional loans vs. FHA loans. Aside from this, they would only allow you to pay the non-recurring costs whereas on a FHA loan, they allow you to pay the recurring and non-recurring costs.

What makes conventional loans vs. FHA loans more disadvantageous than the latter is that it allows a non-occupant to be a co-borrower to be a co-signee on the loan. They even allow the income of both the borrower and co-borrower to be combined and use to qualify for a loan.

Even more, the difference of insurance of conventional loans vs. FHA loans varies a lot. Insurance is mandatory for all of FHA loans no matter what the amount of the loan. It includes both a monthly mortgage insurance premium and an upfront mortgage insurance premium. Good thing about this is that once you have paid the premium for 5 years and loan to value is below 78%, you can now stop paying the premiums.

Whereas conventional loans do not provide you with an insurer, you have to look for a private insurer. They would also provide you with just a monthly mortgage insurance premium. But they would only require you to get these insurance if the loan to values are over 80%. Thus, in terms of being more secure, conventional loans vs. FHA loans are a lot riskier.