FHA vs. Conventional Loans

Difference between FHA and Conventional Loans

These are loans that are available to home buyers in the United States. With the sky rocketing prices of property, acquiring a house in the US is becoming a hard wish to fulfill. The high interest rates on loans require loan borrowers to pay a down payment of 10% of the value property of the house to be acquired. This procedure is too much involving and majority of the people depends on their bank’s terms and conditions. They readily accept them without any further look on the availability if better ones elsewhere. Among the common loans that are very much popular to most people include the FHA loan and Conventional loans.  Each of the loans has its own advantages and disadvantages, requirements and eligibility status. Decision making on which loan to go for is left for you, according to your needs to be addressed.

Federal Housing Administration Loans

FHA is provided under the authority of the Department of Housing and Urban Development. These loans are insured by the federal government. The financial institutions offering these loans are assure of safety by the US government. These loans were very well-liked in the sixties but went down out of favor when the property prices went up past the credit limit that was set by FHA. This required frequent adjustment of the borrowing limit that was instilled by FHA

FHA is not directly involved in the issuance of loans, the only function that they serve is to provide assurance that in case of a default by the borrower they are able to refund the amount borrowed by the defaulter to the lending institution. This loan is meant to encourage first home owner to secure home for themselves. FHA interest rates are also competitive when compared to conventional loans. On the other hand, anyone with FHA loan cannot get another FHA loan while he/she is servicing the earlier loan.

Conventional Loans

These are the loans that are provided by the financial institutions and are further classified as commercial loans. They are very much favorable for people with excellent credit history and enough money to make the down payment. The superior the credit score, the better chance you stand in negotiating with the lending institutions for a lower interest rate. These loans are not backed by the government guarantee. They remain the borrower’s investment assortment till they are fully serviced. Home owners who have availed conventional loans from financial institutions enjoy some tax benefits. Good repayment history by the borrower may make the lender to give more money for property renovation or purchase of furniture.

Distinction between FHA and Conventional Loans

Even though both of this is meant to secure financial assistance in buying a house, each has its own specific characteristic which must be instilled properly when deciding on the method of acquiring funds. Of major concern is that not everyone can apply for an FHA loan as there are some qualifications to be met. These two loans then differ according to the following perspectives.

ü  Low down payment of 3.5% in FHA loans while Conventional loans require a 10-20% down payment.

ü  Lower loan fees and closing costs on FHA loans

ü  Lower interest rate in FHA loans as compared to those in conventional loans and this is meant to encourage first home buyers. This is due to the security that is given by the federal government on FHA loans.

ü  Credit limit in the case of  FHA loans