Comparing FHA Home Loans to Conventional Mortgages

by Karen Lawson
October 23rd, 2009

The National Association of Realtors (NAR) reports a 9.4% jump in home sales during September. Increasing sales typically suggest rising home prices, but this may not be the case as first time buyers scramble to qualify for the federal tax credit program before it expires on November 30. Other factors contributing to low home prices include rising unemployment rates and the ongoing glut of foreclosed properties on the market in many areas. If you want to buy or refinance , FHA home loans provide a competitive solution for buyers with little cash, or who have credit issues.

Less than 20% Down? FHA Home Loans Can Help

Current mortgage rates are a strong incentive for first time home buyers, and there are no guarantees about how fast and how much rates will increase. FHA mortgage rates are competitive and can help first time buyers get into a home or home owners with little equity refinance their home loans.

Understanding Private Mortgage Insurance and FHA Mortgage Insurance

Mortgage lenders consider home loans with a loan to value ratio (LTV) of more than 80% a higher risk, and require borrowers to pay for mortgage insurance (MI). This insurance reimburses the lender for losses associated with mortgage default and foreclosure. If you’re buying a home with less than 20% down, you’ll be paying for MI. FHA insures its approved lenders against losses in much the same way by charging borrowers an up-front mortgage insurance premium (UFMIP) of up to 1.75% of the mortgage amount at closing. The UFMIP is typically rolled into the mortgage amount. FHA guidelines require homeowners to pay MI premiums until their LTV ratio reaches 78%. FHA mortgage insurance costs can be lower than for MI premiums charged by private mortgage insurance companies, depending on your loan amount and the size of your down payment.

FHA Loan Requirements More Flexible

MI companies insuring conventional mortgage loans are tightening credit requirements for insuring conventional loans; minimum FICO scores of 720 may be required regardless of other lending guidelines. If you’ve had good payment records for the past year but have had past credit problems, an FHA refinance or home loan may meet your needs. Borrowers with a foreclosure a minimum of three years ago or a bankruptcy discharged at least two years ago may be eligible for FHA home loans.

An FHA refinance can assist homeowners who want a lower mortgage rate but don’t have enough home equity or cash to meet conventional lending requirements. If you’re shopping for a new mortgage loan, consider getting FHA mortgage loan quotes.

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