How to Select Between FHA And Conventional Mortgage Loan

FHA vs Convetional Mortgage

Once you have read my article on getting $8000 Tax credit on a home purchase, it is time to understand the details of mortgage that a bank will approve you. You can find the home purchasing articles at http://www.ehow.com/how_4789981_buy-home-using-tax-credit.html. Most of the people rely on their lender's recommendation but it is important that you understand the meaning of what you are going to buy as it can save you lot of money.

Things You'll Need

• Market Research
• Reliable banking / finance agent
• Information from friends and relatives
• Money for downpayment - 3-5% for FHA loan and 10% for Conventional loan.

Instructions

1. MARKET RESEARCH -

   Know the market. Read finance news daily as this is the time when you are going to make the biggest purchase of your life - A home; and you have to make sure you spend money wisely and build your equity as soon as possible. Note down and record the interest rates for a few weeks. Be aware of the news and trends which will give you an idea about when you should lock the best possible interest rate.

2. TYPES OF LOANS -

   When you find a good finance agent, you will be explained terms and conditions of two most common mortgage types - FHA and Conventional Loans.

3. FHA LOANS -

   FHA (Federal Housing Administration) provides a loan guarantee program in lieu of private mortgage insurance (PMI) so that qualified people can get loans with low down payment. You can transfer your FHA loan to a new buyer of your home without them paying any additional costs, which makes it easier to sell your home.

4. CONVENTIONAL LOANS -

   Conventional loans require a down payment of at least 10% and strict guidelines of credit requirements. However, if qualified, Conventional loans can be obtained at a lower interest rate than FHA loans.

5. COMPARISON BETWEEN FHA AND CONVENTIONAL LOAN -

   FHA: - 1) 3.5% Down Payment, 2) Occupied by Owner, 3) upto 50% of debt to income ratio should be met 4) Minimum FICO Credit score of 550, 5) Mortgage Insurance should be paid throughout the life of loan

   CONCENTIONAL MORTGAGE: - 1) At least 5% Down Payment, 2) Owner occupied or Investment, 3) Upto 36% Debt to Income ratio should be met, 4) Minimum FICO score should be 680, 5) Mortgage Insurance waived after home equity reaches 20%.

6. WISE DECISION -

   I have observed that Banking agents usually try to push the FHA loans onto their customers. This is because the Banks earn more interest in these loans. Also, since the Mortgage insurance is almost $80 per month, it benefits the Bank. If you have 5-10% money for down payment and an excellent credit history (Check your credit score on equifax.com) then the best decision is to go for Conventional loan because once you reach the 20% equity, Mortgage insurance will be waived and it will reduce your monthly payments.
   But if you have less money for Down Payment, then FHA is your best bet

7. TALK TO PEOPLE AND TAKE A SECOND OPINION -

   It is a good idea to talk to your friends, colleagues or relatives about these loans. They are the best 1st hand sources who will give you the most correct information about these loan types. There are many things that can be taken for granted while making a financial deal so it is better to have information about these before finalizing a deal.

Tips & Warnings

• Do thorough market research on the interest rates and negotiate with Finance Agent or Bank

• Use online mortgage calculators which will give you an estimate of how much you will pay each month on mortgage for various conditions of down payment amounts.

• Do not finalize a deal under influence

• Do not let the Bank decide your situation. You are the owner of your situation and you are fully capable of handling it.

Resources

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