Conventional mortgage loans are mortgages which are not “guaranteed” by the Federal government. A FHA mortgage is a loan that is “guaranteed” by the federal government. Conventional loans are more common than FHA both have their benefits and their downsides. Understanding the difference between a Conventional and a FHA mortgage is an important part of obtaining a new mortgage.
Most loans are conventional loans; and most conventional loans are conforming loans. Conventional mortgage loans require a higher credit score, and in some cases asset reserves. Conventional loans can be used for primary residences, second homes and rental properties (1-4 units). For those homeowners or homebuyers that pursue a conventional conforming mortgage loan; limits for conforming mortgage loans were raised in 2019.
This is good news for people in California due to our higher home prices. For some their current mortgage is not longer a “jumbo” mortgage (lower rates, easier to qualify for) and for others it might allow them to now buy that home since their loan amount is now a conforming loan amount. Fannie Mae and Freddie Mac have been granting more appraisal waivers with their approvals which has been an added bonus for California homeowners.
Conventional mortgage loans can have either a fixed rate or an adjustable rate (adjustable rate mortgages usually have a “fixed period” of 3, 5,7 or 10 years. After the fixed period your rate adjusts to current market conditions which are the index your loan is based on and a predetermined margin).
Conforming Mortgage Loans:
In the category of Conventional mortgage loans is conforming mortgage loans and Non-Conforming mortgage loans. Conforming mortgage loans are mortgages that adhere to the underwriting guidelines set forth by mortgage giants Fannie Mae and Freddie Mac. Mortgage loans that fall outside of those guidelines are considered non-conforming. So you can have a Conventional Conforming mortgage loan or a Conventional Non-Conforming mortgage loan.
The purpose of the FHA mortgage loan program is to assist homebuyers and homeowners get qualified for a new mortgage who might otherwise struggle to obtain a conventional conforming mortgage loan. FHA mortgage guidelines are a bit more flexible in certain areas and are used to either purchase a primary residence or refinance the mortgage attached to a primary residence.
General requirements are for at least a 580 credit score and 3.5% down or equity in the home (if you are doing a refinance). Very few lenders (in 2020) will go below a 580 credit score even though FHA guidelines allow for it. FHA mortgage carry lower interest rates than conventional conforming mortgage loans however FHA mortgages carry Mortgage Insurance (MI) which is an added cost to the homeowner.
Mortgage Insurance (MI) is an insurance policy you pay each month with your mortgage payment to cover the cost of insuring your mortgage. The insurance is in place in case you default on your loan. If you default the Federal Government will cover the cost and reimburse the mortgage lender for any losses associated with the default.
Some conventional conforming loans have Private Mortgage Insurance (PMI) which is similar to MI however that is only required if there is less than 20% equity in the home (or if your down payment is less than 20%). The FHA mortgage loan program offers a “streamline” option for refinancing; no appraisal is needed and borrowers can close fairly quickly if rates are below their current rate.
Which One Is Better?
It depends on the individual person. If you have a credit score above 740 and a good sized down payment the FHA loan program might not be for you unless you are looking to purchase a home (or refinance) that needs work. The FHA 203(k) loan program is one of the best loans out there and it’s even a great option for those with excellent credit.
Essentially it’s two loans in one; a loan to purchase the property and loan to repair/remodel the property. All one loan, one lender and one application.
If you have a sub 680 credit score and/or a small down payment you may want to focus on the FHA loan program especially if you are a First Time Home Buyer. When it comes to deciding which loan program is better the best thing you can do is talk with your Loan Officer and discuss your different options.
Lowest Mortgage Rate:
Obtaining the lowest mortgage rate for a conventional or non-conventional mortgage loan, such as an FHA loan, is something every homeowners hopes for when they purchase a home or refinance a current mortgage. Working with a top rated mortgage company will help ensure you receive the lowest mortgage rate at the best possible terms. If you chose to work with a mortgage company that has a bad reputation and/or a bad rating with the Better Business Bureau you are taking a serious risk with one of the most important financial transactions you’ll ever take.