Many people wonder about the correct choice between a FHA vs conventional home loan mortgage for their upcoming house purchase.

Is the government related FHA really a better option for saving money with the cheapest mortgage rates and FHA closing costs or private conventional mortgage loans have more flexibility?

Generally, the FHA is based on common sense loan approval while conventional home loan brokers are almost entirely credit score driven.

FHA Loans Information

FHA loans from the Federal Housing Administration are more easily available to homeowners with less than ideal credit scores, and are more lenient regarding income and mortgage requirements as well as underwriting guidelines. After all, FHA was set up to help more American families own their own houses despite having lower income.

That is why compared to conventional mortgages, FHA loans information are more lax and personal credit scores are not used as the main deciding factor on approving FHA home mortgages. In contrast to conventional mortgage lenders, FHA will consider the applicant's debt payment history and income level.

The interest rates on FHA mortgages are similar to the conventional ones, so normal homeowners will not be saving money on this aspect other than the cheaper FHA closing costs. However, for bad credit homeowners, this can mean the difference between getting a FHA loan to own a house or continue to rent rooms because you are rejected by conventional mortgage lenders on the basis of poor credit history.

The main problem with FHA loan requirements is their stricter stance on the condition of the house, and their own in house FHA appraisal guidelines. FHA levies a one time upfront mortgage insurance premium (MIP) that is added to your mortgage loan. This FHA MIP is required on all approved loans and this will cost 1.5% of the total loan amount. This helps FHA to mitigate risk on all their loans by having another insurer to underwrite these loans. If you are applying for a $100,000 dollar mortgage, the total amount owed will be $101,500.

Some people do not like this extra cost involved with FHA mortgages. Do not confuse this MIP overhead with the FHA PMI. FHA mortgage loans also require homeowners to pay a monthly mortgage insurance premium regardless of the amount of home equity owned so far (conventional home loan brokers only require this PMI when you have paid less than 20% of the house value).

These emphases on mortgage insurance is due to the fact that FHA loan borrowers have bad credit and are likely to have problems repaying the full loan punctually. These extra insurance expenses are necessary to offset the higher borrowing risk carried by FHA. The only exception is when you are applying for a short term 15 year mortgage that is less that 90% of the home's appraisal value. In this case, you are allowed to forego optional the monthly mortgage insurance.

Compared to FHA mortgages, conventional mortgage lenders have been offering house owners with good credit access to a cheap home loan for a long time. By specifying stricter loan requirements and targeting only borrowers with above 650 credit scores, these conventional lenders have been able to reduce their business risks and hence provide competitive mortgage rates vs FHA loans.

Fannie Mae (FNMA) provides the My Community loan program while Freddie Mac (FHLMC) offers the Home Possible mortgage plans to compete with the FHA. These also have more lenient requirements on credit scores and history, and the amount of house loan down payment required is kept to the minimum. Both mortgage products are popular with homeowners with average credit ratings because they are based on the same cheapest mortgage rates and flexibility.

A primary difference between FHA vs conventional lenders is the amount of closing cost added to the closing statement (HUD). Along with the loan interest, these closing costs are also part of the service charges and profits earned by the mortgage lenders. You need to request the conventional lender to disclose all their applicable fees on the so called good faith estimate (GFE) form to avoid falling prey to dishonest lenders that charge hefty and uncalled for junk fees. When you are attracted to the services of a no closing cost mortgage, take a quick look at the GFE to see if there are any new charges being levied.

The GFE will list the various lenders’ fees annotated with numbers 801, 802 and so on. Ever since the FHA have been enforcing strict compliance on these fees, the lenders have resorted to charging one origination point and two discount points for their services. Furthermore, the mortgage loan rate is also adjusted upwards correspondingly in exchange for the no closing cost offer. For example, they can earn up to $12,000 by granting a $200,000 mortgage loan.

The main basis for choosing a FHA vs conventional house loan mortgage still depends on your personal credit score. For people with bad credit, most of the time you have no choice at all but to go with a FHA mortgage. When you have good creditworthiness and can put forward a larger down payment on the house such that your loan to value (LTV) is less than 80%, a conventional mortgage with low closing costs can be cheaper because you can choose to avoid paying for the monthly mortgage insurance (PMI).

Note that if you start your conventional mortgage at more than 80% LTV, you are still required to pay the monthly PMI but once your home equity raises to above 20%; you can choose to remove it. For FHA loans, this PMI component is necessary until you fully cleared the debt.

The difference in insurance charges that you will see over FHA vs conventional mortgages pertains to type of homeowners targeted by each party. Conventional mortgage lenders (Fannie Mae, Freddie Mac) actually allow their borrowers with good credit to forgo the mortgage insurance if the remaining loan is less than 80% of the house appraisal. However, FHA does have several schemes in force for foreclosure protection to help homeowners who are in trouble to continue afford the mortgage installments. This can be very useful if you are worried about future financial hardships.

If you only have average credit ratings, most conventional lenders will request you to put forth a larger down payment for the house. However, FHA loan requirements on down payments can go as low as 3%, which allows many home buyers to be able to get a mortgage for their houses. This is again due to the FHA not using your credit score as the basis for approving loans. If your income and job stability appears to be able to afford the house, you will be able to get the FHA loan despite your previous financial mistakes and debts over the years. It thus appears that the FHA vs conventional mortgage issue is already skewed to begin with.