The 2009 fiscal year is shaping up as the biggest on record for FHA loans. Applications for single-family home mortgages were up 50 percent from Oct. 1 through mid-August. Approvals have jumped 70 percent, to 1.67 million.
FHA has carved out a huge chunk of the market in the last three years, from 3 percent in 2006 to a whopping 23 percent today. Borrowers of all stripes are turning to the FHA for help in obtaining a mortgage and achieving the dream of homeownership.
One of the major reasons is the FHA’s low down payment requirement, which starts at just 3.5 percent. Conventional loans often require a down payment of at least 10 percent. That’s just one of the big differences between FHA loans and conventional loans.
Here’s a look at some of the other major differences between FHA and conventional loans:
Conventional Loans: Conventional loans are traditionally more difficult to qualify. FHA loans are backed by the federal government. But there are no such guarantees with a private conventional loan, meaning lenders often employ greater scrutiny and put significantly more emphasis on credit scores. Prospective borrowers with past instances of foreclosure or bankruptcy may struggle to obtain conventional loans or pay significantly more for them.
FHA Loans: The FHA examines each case individually and does not rely on blanket credit standards. Borrowers that are two years beyond a bankruptcy can be eligible to obtain a loan, even for the maximum amount. Those who have experienced a foreclosure can be eligible after three years.
First-time homebuyers have traditionally been drawn to FHA loans because of the lower down payments and looser credit requirements. First timers with less than perfect credit may qualify for alternative loan programs (A-minus or ALTA, for example), but many of these come with more expensive down payments and equity requirements and often include pre-payment penalties. This is another area where FHA loans continue to provide more flexible opportunities for a wide range of borrowers.
Conventional Loans: There is no need for upfront mortgage insurance premiums with conventional loans. Borrowers generally have to buy mortgage insurance when their down payment is less than 20 percent of the property purchase price.
FHA Loans: Mortgage insurance is mandatory for all FHA loans. It is typically monthly charge equivalent to 0.5 percent of the loan amount per year. There is also an upfront premium charge of 1.5 percent. The interest is tax deductible.
Conventional Loans: These loans have traditionally had the upper hand in this regard, as loan limits were simply tied to a borrower’s credit history, financial standing and other factors that lending institutions evaluate. Conventional loans generally have larger loan limits than FHA loans in most parts of the country.
FHA Loans: Recent legislative changes have led to loan limit increases for FHA loans, which now extend to about $729,000 in some parts of the country. These limits have always been a part of FHA loans, which aim to primarily help those with low to middle incomes.