Though conventional mortgage may be the most common type of mortgage, at some point one might wonder why FHA loans aren’t as coveted.
Conventional loans are those not insured by the government.
For the lenders, there’s no concrete collateral besides your property, which may not be worth as much in the future. To protect themselves from a possible downturn you’re forced to pay a down payment of usually 20% of the total amount. Also added on to this is a higher interest rate along with a stricter limit in both credit and income requirements.
Usually, a conventional loan is available to you if you have the down payment, a stable income, and decent credit score.
FHA loans take their namesake from the Federal Housing Administration and these loans are insured by the government.
Therefore, the borrower no longer needs a large down payment or increased interest rate; leaving the rate as low as 3.5%. This type of loan is sometimes easier to qualify for, with the minimum requirement of 550 on the FICO credit scale to successfully apply for this mortgage.
FHA loans are limited by a maximum loan amount that varies depending on the county of the home.
The big downside of an FHA loan is you must pay Mortgage insurance (MIP). This includes a one time Mortgage premium as well as monthly mortgage insurance premiums. Mortgage Insurance Premiums contribute to the mutual mortgage insurance fund, a fund that the FHA draws from in case of the borrowers defaulting.