FHA vs. conventional mortgages
By
Dr. Don Taylor
• Bankrate.com Dear Dr. Don,
Please explain the difference between a 30-year fixed and a 30-year FHA loan.
My understanding is that the conventional fixed-rate loan requires 20 percent
down and the FHA loan does not. Also, is there a 15-year FHA loan? I see that
fixed rates are lower as well. Thanks in advance. -- Puzzled Paul Dear
Paul,
The Federal Housing Administration provides a loan guarantee
program in lieu of private mortgage insurance so qualified borrowers can get a
mortgage loan with a low down payment. The FHA doesn't lend
you the money, they guarantee the loan, so the lender doesn't take on a financial
risk by extending you credit. The
U.S. Department of Housing and Urban Development Web site can help you find
HUD-approved counselors in your area who can answer your questions about FHA loans,
specific to your situation. The most popular FHA loan has
a minimum cash investment requirement of 3 percent but permits 100 percent of
the money needed at closing to be a gift from a relative, nonprofit organization
or government agency. FHA lending guidelines are not as strict
as the Federal National Mortgage Association (Fannie Mae) or the Federal Home
Loan Mortgage Corporation (Freddie Mac). Sellers must pay part of the closing
costs, while some of the borrower's closing costs can be included in the loan
amount.
FHA loans are assumable, meaning you can transfer
your loan to the new owner if you sell your house. That allows the
new owner to take over your FHA loan without the additional cost
of obtaining a new loan. To assume the loan, the buyer has to meet
the credit standards for the loan. This feature can make it easier
to sell your home.
There are three FHA loan programs:
1. FHA 203(b) fixed-rate mortgage (15- or
30-year loans)
2. FHA 251 adjustable-rate mortgage
3. FHA 2-1 buy-down loans
There's also an Energy Efficient Mortgages program
that allows homeowners to finance adding energy-efficient features
to new or existing homes as part of either their home purchase or
FHA refinancing.
The biggest disadvantage to FHA loans is the mortgage
insurance premium. In most 15- or 30-year FHA loans, the borrower
pays 1.5 percent of the loan amount at closing, along with a 0.5
percent annual renewal premium paid annually over the life of the
loan.
Unlike private mortgage insurance, the mortgage
insurance premium isn't canceled when the homeowner's equity reaches
a target level. You may qualify, however, for a partial refund of
the upfront mortgage insurance premium if you owned your home for
less than five to seven years. It's five years for loans closed after
Jan. 1, 2001 and seven years for loans closed before Jan. 1, 2001
and after September 1983.
You need to shop rates when looking for a FHA mortgage
just as you would with a conventional loan because the rates are
established by the lender, not the government. FHA loan rates are
typically higher than conventional (nongovernment guaranteed) loan
rates but shouldn't be a lot higher unless you have credit problems.
Before you start applying for loans you should request
a copy of your credit report from at least one of the three major
credit bureaus and get a credit score from them as well. Review
the report for errors. If you find any, use the dispute-resolution
process to correct the report. Bankrate provides contact
information for the credit bureaus and a guide
to handling the dispute-resolution process.
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