FHA Mortgage Vs. Fixed-Rate Conventional Loan: What’s the Difference?

FHA Mortgage Vs. Fixed-Rate Conventional LoanWeighing all your options as a first-time home buyer can be stressful. That’s because there’s more than just standard, or conventional fixed-rate mortgages to choose from. Aside from adjustable-rate mortgages, of which there are many varieties, the fixed mortgage also has different choices available to consumers. But most of the time, if you’re looking to buy a home and take out a fixed-rate mortgages, your top choices would be a conventional one, or a loan backed by the Federal Housing Administration.

Adding a bit of a backdrop to this blog post, we should also add that the Obama administration recently introduced some changes to FHA mortgages. Late last year, Fannie Mae and Freddie Mac both said that they will start backing (standard) fixed mortgages with a down payment of as low as 3 percent, while President Obama himself announced in January a reduction of 0.5 percent to FHA mortgage insurance premiums. So with that out of the way, let’s compare the two types of FRMs.

Conventional mortgages, for starters, can now be taken out with down payments of only 3 percent. You will typically need a minimum FICO credit score of 620, and if you filed for bankruptcy or had your old home foreclosed, you’ll need to wait four and seven years respectively before applying for this type mortgage. Insurance is required only for mortgages where the loan-to-value ratio exceeds 80 percent, and will only end once your LTV ratio hits 78 percent.

All residential properties are covered by conventional FRMs, and you get a wide range of loan program choices. However, you will need to refinance the standard way should you decide to do so in the future.

Moving on to FHA fixed-rate mortgages, your minimum down payment is 3.5 percent, but you can qualify for such a mortgage with a credit score of 500. You’ll need to wait three years after foreclosure or two years after bankruptcy before applying for these loans. All FHA mortgages require mortgage insurance, and you’ll need to pay insurance for the entire life of the loan. FHA mortgages are not available for investment or second properties, you only have a handful of standard loan programs to choose from, and talking about refinances, you can opt for a Streamline refinance.

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Long story short, each of these mortgage types have their own pros and cons, so remember to choose wisely.

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