Why Is an FHA Loan Better than a Conventional Loan?

An FHA loan is often a better option than a conventional loan because of its guarantee. An FHA loan is backed by the federal government, meaning that if the homeowner defaults on the loan, the federal government will pay the lender a portion of the loan value. The process works very much like an insurance policy in which a claim occurs when the borrower fails to meet his obligations.

Lower Requirements

With FHA backing on a home loan, the lender faces less risk in lending to a less-than-qualified home buyer, so an FHA loan has lower requirements than a conventional loan with regard to the borrower's income, credit history and employment record.

Credit History

While the lender still makes the final decision regarding allowable credit scores, you may qualify for an FHA loan if you've had problems with credit, even if you've filed bankruptcy. Lower credit-history requirements also mean that those without an extensive credit history also may qualify.

Reduced Down Payment

One of the key features of an FHA loan is the reduced down payment requirement. Some conventional loans require as much as 20 percent to be paid on the home before the lender will finance the rest. With an FHA loan, only 3 percent is required. This down payment also can come from others, such as family members, charitable organizations or employers, while most conventional loans require that the down payment funds come directly from the borrower.

Costs

FHA loans usually have competitive interest rates, and closing costs are lower than with conventional loans because the FHA regulates the fees that are charged to keep the program affordable.

Potential Help

FHA loans are also beneficial because the FHA offers aid and assistance if you're struggling to make your payments, including options to help you avoid foreclosure. The FHA will work with you and your lender to find a solution and often will offer refinance options.

References

• U. S. Department of Housing and Urban Development