What’s the difference between an FHA loan and a conventional?
Saturday, November 21st, 2009 at
9:06 pm
I have a friend that’s looking to buy a house and she asked me if I knew the difference. I have a conventional but I have no idea what makes it different from a FHA loan…
Any help?
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Conventional means that the loan is underwritten to Fannie Mae and Freddie Mac (AKA Agencies) guidelines, and must meet their criteria for them to buy the loan from the lender. Example:
You go to Chase, Wachovia, etc to get a mortgage, and they offer you a conventional loan. A conventional loan can come as an interest-only or full amortization loan, fixed or adjustable rate, with amortixation terms up to 30 years, though some convetional programs can go as far as 40 years. These banks then sell the loan to the Agency that it was underwritten to and service the loan for the Agency (ie take payments, enforce the terms of the loan, etc).
They may also have a “portfolio” product, which is non-convetional, but may also be fixed, adjustable, etc, and is not sold to the Agencies, and retained in the bank’s portfolio.
FHA (federal Housing Authority) is a government mortgage program, and it is as simple as that. It has less stringent credit requirements, and aside from a few technicalities, may be more beneficial than a conventional mortgage for someone based on the new tax laws. It is also serviced the same way a conventional mortgage is – Chase/Wachovia/etc writes the loan, sells it to FHA for insuring purposes (FHA insures the lender against default), and Chase/Wachovia/etc services it.
Just as an FYI, someone can get a conventional mortgage with 3% down, just like they can with FHA. However, the PMI (private mortgage insurance) on a conventional loan will be significantly higher with a conventional mortgage than an FHA loan, because with an FHA loan they may finance a portion of the PMI (known as MIP for FHA) into the loan, and thus it becomes tax deductible as you apy interest on it. Also, if they may less than 100K household income, PMI is fully tax deductible thru 2010.
Also, FHA has lower loan limits than conventional does, is set by county. For instance in Cali, the loan limits are higher than say in Oklahoma, and then you have to check each county. The conventional loan limit used to be 417K, but doe to GW’s stimulus package, these were increased recently, but may only be temporary (FHA’s were as well).
Just so everyone understands, a fixed-rate mortgage is a fixed-rate mortgage, plain and simple. An adjustable is exactly that, and an interest-only loan is exactly what it’s called. These are the 3 basic porducts offered in the mortgage industary, and when used wisely, they work just fine, as was the case prior to the refi boom.
I hope this helps.
An FHA loan requires a lower down payment and is stricter on the condition of the house. You might get an FHA for around 3% down whereas a conventional might require 20% down. FHA requires things like hand rails at the steps, no chipped paint, exhaust fans in the bathrooms, and things like that.
Luis S. is right except that FHA has just increased SUBSTANCIALLY their loan limits as of March 2008 through the end of this year. If you have any credit issues FHA is better 3% down- seller can pay up to 6% in closing costs for you. Most conventional are now 10% minimum down payment- the 100% loans are gone.