Difference Between FHA & Conventional Mortgages
An FHA, or Federal Housing Administration, mortgage is a government mortgage product. A conventional mortgage is underwritten by Fannie Mae or Freddie Mac. While the two types of mortgages are similar in concept, each has specific rules and regulations associated with the loan. A borrower may be able to qualify for one type of mortgage but the other.
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Significance
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The FHA created its mortgage program to give Americans with lower credit scores and down payments the opportunity to own a home. The lowest credit score allowed with a conventional mortgage is 620, while the lowest allowed with an FHA mortgage is 580. Most conventional mortgage programs require a minimum 5 percent down payment, while FHA mortgage programs require a minimum 3.5 percent down payment.
Features
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Both FHA and conventional mortgage programs allow borrowers to purchase or refinance a home in the same manner. The largest difference to the borrower is in terms of PMI, or private mortgage insurance. Borrowers purchasing or refinancing a home with a conventional mortgage must have PMI unless they have equity or a down payment equal to 20 percent of the home's value. With an FHA mortgage, however, the borrower is required to have PMI for the first five years, regardless of down payment or equity.
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Types
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With both FHA and conventional mortgages, a borrower can purchase a fixed or adjustable rate mortgage. The payments can be principal and interest, or interest only with a conventional mortgage. With an FHA mortgage, however, there is no interest only option. The term of the loan can range from 10 to 50 years with both products, with the most popular terms being 15 and 30 years.
Considerations
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While a borrower with a credit score close to 620 can qualify for a conventional mortgage, he may want to choose an FHA mortgage instead. There are stiffer penalties in relation to interest rate for a conventional mortgage than with an FHA mortgage. A borrower with a mid-600-range credit score may get a much lower interest rate with an FHA mortgage than with a conventional one.
Benefits
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Even though a borrower with an FHA mortgage has to pay PMI for the first five years, she still has the option of making a small down payment. This allows her to hold onto more of her cash reserves in the event of an emergency.
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References
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