Tuesday, March 20, 2012
FHA vs Conventional
Our latest mortgage match-up pits FHA loans against conventional loans, both of which are popular options for homeowners these days.
In recent years, FHA loans have surged in popularity, largely because subprime lending (and Alt-A) was all but extinguished as a result of the ongoing mortgage crisis.
Some even claim FHA loans are the “new subprime,” mainly because of the low down payment and credit score requirements, despite originally being designed for low and moderate-income borrowers.
But you don’t have to be a subprime borrower to take advantage of an FHA loan.
FHA Loans Are a Great Low Down Payment Option
As noted, these government-backed home loans have become insanely popular. The main selling point of an FHA loan is the 3.5% minimum down payment requirement.
However, in order to qualify for the flagship low down payment option, you need a minimum credit score of 580.
And 580 is just the FHA’s guideline – individual banks and mortgage lenders still need to agree to offer such loans.
So there’s a decent chance you’ll need an even higher credit score. Of course, a 580 credit score is pretty dismal…
FHA Loans Good for Those with Poor Credit
The other major selling point to an FHA loan is that the minimum credit score is 500. Again, this is subject to lenders actually offering programs for scores this low. And scores between 500 and 579 require a minimum down payment of 10%.
But FHA loans can be a good option for those with poor credit who are determined to get a mortgage.
Another benefit to going with an FHA loan is the higher loan limit, which is as high as $729,750. This can be a real lifesaver for those living in high-cost regions of the country.
Meanwhile, conventional conforming loans backed by Fannie Mae and Freddie Mac are capped at $625,500. Anything above that is considered a jumbo loan, and will come with a higher mortgage rate.
FHA Loans Subject to Mortgage Insurance
We’ve talked about some benefits of FHA loans, but there are drawbacks as well.
The major one is the mortgage insurance requirement. Those who opt for FHA loans are subject to both upfront and annual mortgage insurance premiums.
The upfront mortgage insurance requirement is unavoidable, and the annual premium can only be avoided if you have 22 percent or more home equity and a loan term of 15 years or less.
All other borrowers must pay the annual mortgage insurance premium for a minimum of five years, which will clearly increase the cost of the mortgage.
[Note that FHA insurance premiums are also slated to increase!]
Keep in mind that FHA loan offerings are pretty basic. They offer both purchase money mortgages and refinance loans, but the choices are slim.