FHA Loan

The difference between an FHA and a Conventional Loan

While many people deciding on a loan product in RI, MA, CT, NH, VT, and ME rely exclusively on their lenders recommendation, you should understand the basic difference between an FHA loan and a Conventional Loan. The term Conventional Loan includes all loans under the current FNMA and FHLMC lending limits. Some of these may be called Conforming, A paper, subprime and other industry names.

Most people that have heard of FHA loans tend to associate them with purchase money transactions. While purchases are the most common use, FHA loans are also available for rate and term refinance loans as well as Cash Out refinances.

The main advantage of a FHA vs conventional loan is that the credit qualifying criteria for a borrower are not as strict as conventional loan financing and the down payment or equity requirements are also less.  To purchase, you can put as little as 3.5% down.
In comparing a purchase money FHA loan against a conventional loan, FHA loans will allow the borrower who has had a few "credit problems" or those with limited credit history to buy a home. An FHA Underwriter will require a reasonable explanation of any derogatory credit, but will approach a person's credit history with common sense credit underwriting. Most notably, borrowers with extenuating circumstances surrounding a bankruptcy that was discharged 2 years ago can be approved for maximum financing. Conventional financing, on the other hand, would require 4 years to have passed to be eligible for consideration. Also, Conventional loans rely heavily upon credit scoring. You still may qualify for an FHA loan even if you don’t meet the minimum score requirements of a Conventional mortgage.

If a borrower does have past credit issues an FHA loan may be significantly cheaper than an alternative loan such as subprime. These other programs generally have higher interested rate of require a larger down payment or Equity position. Many of these alternative loan products have Pre Payment penalties where as FHA loan do not have such penalties. In fact FHA loans can be easily refinanced under the Streamline program.

Another advantage of an FHA vs conventional loan is that FHA is one of the few home mortgage programs that allow a borrower to have their down payment gifted from a family member, a governmental agency, or non-profit organization. This allows home buyers without the necessary money to buy a home today.

Licensed in RI, MA, CT, NH, VT, and ME.

To determine if you are eligible for an FHA loan, click Apply Now.