Comparing the FHA Loan to a Conventional Home Loan

Many people wonder if an FHA loan is really a better option for them. While many people can qualify for other loans these federally insured loans are a great option for a lot of people. When you sit and compare an FHA type loan to a conventional loan you will soon see all of the benefits to the borrower and you may start to think that this is the way to go, even if you questioned it previously.

The Comparison

A great starting point when you are comparing an FHA loan to a conventional loan is the down payment. When you buy a home with a federally insured loan you will usually be required to put down three percent of the purchase price while you will be required to put down at least five percent with a conventional loan and perhaps as much as 15 percent. If you don't have a lot of cash on hand you would obviously find that the FHA option is a better one for you. Even if you are buying a $100,000 home the difference between a three and five percent deposit is $2,000 and when you don't have a lot of cash $2,000 is a lot especially because you will also be required to come up with the funds for closing costs.

Another good point of comparison is the monthly mortgage insurance payments. With an FHA loan you are going to have a lower monthly mortgage insurance payment than you would have with a conventional loan, and all of the fees that you pay add up and can easily make a loan unaffordable for you. The cost of mortgage insurance should be considered as it can vary widely.

If you have less than perfect credit you will find another important point of comparison is credit scores. With an FHA loan there are no credit score requirements but with conventional loans credit scores are required. Obviously, if you have bad credit you would choose the option that would not have credit score requirements because you have a better chance of being approved for this type.

With an FHA loan you also have the benefit of having controlled closing costs but with conventional loans there are not any controls on amount of type of loan closing costs. With a federally insured loan you will probably pay a couple thousand dollars in closing costs but with conventional loans these costs can quickly get out of control and you can find that you are in the tens of thousands of dollars—just to close on the loan!

As a benefit to the borrower, the FHA has property standards but conventional loans do not. What this means is that you will not be able to be sold a home that is poor condition, your home will need to pass termite and clearance tests whereas when you have a conventional loan you will not have this knowledge. Many times when these reports are not required the buyer will find out after the fact that they bought a true money pit.

The differences between these types of loans don't seem all that big until you break them down and suddenly they become very different. The bottom line is that when you have a loan that is insured by the Federal Housing Administration, you are more protected when you do not. You also have a more affordable loan, and for most consumers affordability is important.

To learn more about FHA home loan and its differences when compared to a traditional loan, visit our site at: http://www.refinance.com/