FHA Loans vs Conventional Loans: Which loan is best for you?

There are many misconceptions about FHA loans (Federal Housing Administration) and Conventional (typically Fannie Mae or Freddie Mac) loans. I’ve heard everything from “FHA is the new sub-prime” (it’s not) to “FHA is for poor people” (also, not the case).

You have certain loan officers pushing one loan product over the other, why? Well their motives are quite simple…they’re getting paid to! This is a disservice to the home buyer because there should be no agenda for placing a person in a loan besides putting them in the one that is best for them.

When I was in college trying to decide my major, I went to professors in different departments and they all gave me wonderful insight. What none of them gave me was a solid answer, they simply said “This is why we’re passionate about this field of study but it’s up to you to decide what’s right for you.” I had to look at my interests, qualifications, and talents.

Same goes for choosing a conventional or FHA loan. You can’t tell you if an FHA loan or Conventional loan is best for you without examining your credit, income, property type, etc. with a qualified mortgage professional. Now, if this all sounds tacky to you then you’re not in the right frame of mind to purchase a home just yet. You should be EXCITED to choose your loan!

Let’s talk specifics now, if you:

  • Have good credit (720 and up)
  • Wish to put at least 10-20% down
  • Currently looking to purchase an investment or rental property
  • Do not want to declare your spouse’s debts/liability
  • Do not plan on living in the property after a set period of time

Then  Conventional Loan is probably best for you. Conventional Loans through Fannie Mae allow for people who have good credit, plenty of capital, and intentions to purchase as a sole proprietor to get financing. In this economy though, it is rare for someone to walk in and drop 20% on a house, it is important to know that Fannie Mae DOES NOT require you to put 20% down. Anyone who has told you this is LYING. The caveat with putting less than 20% down is that you have to procure Private Mortgage Insurance, which in this day and age is difficult to qualify for.

Now, alternatively if you:

  • Are a first time homebuyer with less than a 10% down payment (3.5% minimum)
  • Have fair credit (620 and up)
  • Plan to occupy the purchased property as your primary residence
  • Are wishing to purchase a condominium
  • Want to purchase a 2-4 unit complex

Then FHA loans would probably fit you best. The credit qualifications are generous and allow you to get into a home with a smaller down payment. FHA loans do carry a mandatory 5 year mortgage insurance though, regardless of down payment, and those upfront mortgage insurance premiums have increased significantly in the past 6 months (More information about increasing mortgage insurance premiums).

Additionally, FHA loans are ideal for condo and multi-unit purchases because they do not charge a penalty. Conventional loans charge up to a 1.5% penalty for multi-units and 0.75% penalty for condos.

Bottom Line

There are many loan programs out there (see USDA Loan and CalSTRS 80/17 Loan) that compete if not outright defeat FHA loans and Conventional loans. However, a broad majority of people can comfortably fit into these two loan programs. It is simply a matter of earnestly looking at your financial situation and your purchase goal.


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