Which Is Better: FHA or Conventional Loans?

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The answer to the question of which mortgage type is better for you depends on your situation as a home buyer. Federal Housing Authority, FHA, loans and conventional loans have distinct benefits and drawbacks that make them more or less appealing. You have to compare the pros and cons of each major loan category to decide which is best for you.

Conventional Loan Benefits

Many home owners generally perceive conventional loans as better because they are "conventional." Buyers that can afford the common 20 percent down payment and have good credit, typically use conventional loans because it often offers the best interest rate and loan terms. By putting 20 percent down on your home purchase, you also build more equity from the start than you would by taking advantage of lower down payment requirements on FHA loans.

Conventional Loan Drawbacks

Some home buyers simply cannot afford the requirements of a conventional loan. Without a 20 percent down payment, you pose a greater risk to the lender and are not going to get the same favorable rate and terms. Conventional loans also put more pressure on the typical borrower to keep up with loan payments and to avoid delinquency or foreclosure. You can buy private mortgage insurance to cover events that put you out of work, but this insurance can often be expensive.

FHA Loan Benefits

Three major benefits of government-sponsored FHA loans are: low down payments, low closing costs and easier credit qualifying, according to U.S. Housing and Urban Development. These loans are intended to offer options to buyers who are not able to get conventional loans. You can often get an FHA loan for as little as 3.5 percent down on the purchase. Credit requirements are less stringent, as well.

FHA Loan Drawbacks

The most significant drawback of FHA financing is that it comes with a requirement that the borrower purchase mortgage insurance. This adds about 1.5 percent to your loan repayment, according to the Mortgage Loan website. You can potentially remove the need for mortgage insurance by building up equity into the home. However, this increase on your monthly mortgage repayment is a challenge for borrowers that are often pressed by tight budgets.


About the Author

Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. He has been a college marketing professor since 2004. Kokemuller has additional professional experience in marketing, retail and small business. He holds a Master of Business Administration from Iowa State University.

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