Understanding the Difference Between an FHA Loan and Conventional Home Loan

Picking the right home for your family means picking the right type of home loan as well. If you lack a huge down payment, you may qualify for and benefit from an FHA loan. Here with us is our very own real estate attorney Vanessa Clayton with a simple overview of loan options for today’s families.

Hi Vanessa! Thank you for being willing to share with us. First off, you’re new to Homie. Welcome aboard and congratulations!

Thanks, I’m so excited to be here!  We have such a great team at Homie that truly loves helping buyers and sellers throughout the process of representing themselves and saving money.  I love getting to help our customers with what is oftentimes one of the biggest and most important transactions in their lives!

What is an FHA loan and who is it for?

An FHA loan is a type of mortgage loan that is insured by the Federal Housing Administration (FHA). FHA loans protect lenders against potential losses as a result of a homeowner defaulting on their mortgage loan. The FHA loan program is also great for homebuyers who may not have the traditional 20% down payment saved, or the best credit score, but would like to purchase a home. Buyers can leverage an FHA loan to purchase a home with a down payment as little as 3% of the purchase price.

So if FHA is an agency, is it also a bank?

No. The FHA is a US government agency created in the 1930s to help stimulate the housing market. The FHA, and specifically their loan insurance program, remains popular to this day. Buyers obtain their loan through an FHA approved lender, as the FHA is not a lender itself but is instead an insurer.

What are the benefits of an FHA loan compared to other types of mortgage loans?

The first benefit is the ability to get a loan even if you have a low down payment. Conventional loans typically require a down payment of 10-20% of the purchase price. A minimum FHA down payment can be much lower and is directly related to a buyer’s credit score. Buyers with a credit score of 580 or higher can put down as little as 3% on the purchase of their new home. Have a credit score of less than 580? Not to worry, you may still qualify for an FHA loan if you have a credit score between 500-579, but the down payment requirement will be higher.

A second benefit is that FHA loans also require the seller and lender to pay most of the closing costs. Closing costs can be a significant expense, so this is a great option for buyers who may not have cash readily available. If you’re low on cash and want a seller to pay closing costs, you’ll need to include that as part of your offer. There’s a separate FHA addendum that you’ll need to include with your contract, so make sure to let your real estate attorney know if you are going the FHA route.

What are the costs associated with an FHA loan?

When utilizing a FHA loan, buyers will pay an additional fee called a mortgage insurance premium, which is used to protect the lender against potential loss as a result of a default on the mortgage. There are two types of mortgage insurance premiums. The first mortgage insurance premium occurs up front and is 1.75% of the loan, regardless of the borrower’s credit score. The second mortgage insurance premium is an annual premium (paid monthly along with your mortgage payment). A buyer may be able to get rid of the annual mortgage insurance premium once the buyer has enough equity in the home (usually 20%).

How do buyers qualify for an FHA loan? Are there age requirements or limits on the number of homes they’ve purchased in the past or own now?

Your lender will walk you through the specific requirements, but here are some items  to be aware of: FHA loans can only be used for your primary residence, and an FHA certified appraiser will need to appraise the property. There is no age restriction or restriction on how many houses you have bought in the past.

What should buyers look for in choosing a bank that does FHA loans?

Most lenders offer FHA loans, so just ask. Be aware, though, that not all FHA lenders offer the same interest rate. As with any loan, it makes sense to shop around to find the right fit. If you’re considering an FHA loan, now is a great time to visit our lending partners.

Thank you so much, Vanessa! I’ll let you get back to work and will end by simply reminding everyone that it is completely free to use our Buy Any Home program. Get the expertise of an attorney like Vanessa when you use Homie to help you buy a home without any real estate agent fees–or any fees at all, for that matter.

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