For decades, the Federal Housing Administration has helped less-than-stellar mortgage applicants refinance and purchase homes. However, conventional loans are the traditional loan of choice for most mortgage shoppers. The government insures FHA loans made by approved lenders, covering them in case of borrower default. Riskier conventional loans may also be insured, but not by the federal government.
FHA Offers Easier Eligibility
FHA-insured loans have relatively lenient qualification criteria compared to conventional loans when it comes to:
- Credit scores and credit history
- Loan-to-value or down payments
- Debt-to-income ratios
The FHA allows a credit score of 500 with a down payment of 10 percent; and a score of 580 with 3.5 percent down. The maximum loan-to-value is 96.5 percent on refinances and purchases. It's also more forgiving of past credit mishaps, allowing you to qualify sooner for a new mortgage if you've had a bankruptcy, foreclosure or other serious credit delinquency. The FHA also tends to be more tolerant of high debt loads. It generally allows a higher DTI than conventional lenders.
Conventional Loans Feature Higher Lending Limits
You can get a higher loan amount with a conventional loan. Conventional loans for Fannie Mae and Freddie Mac have a conforming loan limit of $417,000 for single-family homes in most areas of the country. They have higher limits of $625,500 and $938,250 in certain high-cost areas of the country. Loans that exceed conforming loan limits are known as jumbo loans.
FHA loans aren't intended for high-end borrowing. FHA loan limits are as low as the high $200,000-range in low-cost areas of the country and go up to $625,500 in most high-cost areas. Only a couple of counties in Hawaii qualify for slightly higher FHA loan limits.
FHA Loans Have Higher Costs
You pay private mortgage insurance on conventional loans when you have less than a 20 percent down payment. You pay for government mortgage insurance on FHA loans, regardless of your down payment amount. Mortgage insurance rates vary by lender and depend on your loan's features and your credit scores. However, FHA insurance generally costs more than PMI. In addition to paying an upfront mortgage insurance premium to the FHA at closing, you typically pay a higher rate on the annual premium, according to Bankrate.com.
An FHA loan's interest rate may be lower than a conventional loan's interest rate. However, the higher cost of FHA mortgage insurance can offset a competitive interest rate, making FHA loans more expensive to obtain and pay over time.
Underwriting and Funding Turn Times Vary
Private lenders make FHA loans and conventional loans. The FHA simply provides lenders with qualifying guidelines and an insurance policy. Therefore, FHA loans and conventional loans can require the same amount of time to process and close. The volume of applicants, the lender's resources and the complexity of an individual loan file impact its approval time. A typical mortgage closing takes 30 to 45 days, from beginning to end. However, it can take as few as two weeks for a smooth transaction and as much as two months or more to close if there are complications.
FHA Approved Lenders and Properties Harder to Find
The FHA only works with approved lenders. Furthermore, if you're financing a condominium unit, the homeowners association and condo complex must also be FHA approved. Look for FHA-approved lenders and FHA-approved condo projects on its website.