There are many different types of mortgages available in the marketplace today. Two of the most popular products are traditional or conventional mortgages and FHA mortgages. Both mortgage products allow individuals to purchase homes; however, the qualification criteria are somewhat different.

Credit Guidelines

When it comes to credit guidelines, FHA mortgages allow individuals with less than perfect credit to obtain a home loan. This can include bankruptcy, the use of non-traditional forms of credit references such as utility bills, childcare expenses, insurance premiums and other documentation. Conventional mortgages are much more strict in qualifying individuals for a loan.

Loan Limits

Conventional loans allow for mortages to qualify at up to 107 percent of the home's value. FHA loans require that loans be capped at 97 percent of a home's value. This can be a drawback for some borrowers that choose to finance a higher amount due to improvements that need to be made on the property or to pay off other debts with the difference. The higher loan limits offered by conventional mortgages also allow the borrower to purchase a home that might be priced slighly over market value.

Mortgage Insurance

Borrowers who utilize the FHA program have to pay an insurance premium equals .5 percent of the loan amount broken out over 12 months. With a conventional mortgage, mortgage insurance only has to be paid if the loan amount exceeds 80 percent of the home's value. Mortgage insurance must be paid for the duration of an FHA loan, while the conventional arrangement allows for the insurance to be dropped once the equity in the home tops 20 percent.

Interest Rates

Conventional mortgages base interest rates on credit worthiness while FHA loans do not. An FHA loan is offered at a fixed rate based on the rate set by the federal reserve at the time the loan is originated. A conventional loan is not restricted in this manner. As of 2010, a borrower obtaining conventional financing may receive a rate in the rage of 5.27 percent for a fixed 30 year loan down to 4.76 percent for a 15 year fixed loan or even 4.43 percent for a 5/1 adjustable rate mortgage. These are the best rates for borrowers with excellent credit and lenders can choose to charge more. An FHA mortgage is hovering around 4.6 percent for a 30 year fixed and 4.12 percent for a 15 year fixed.

Foreclosure Intervention

FHA mortgages are backed by the federal government and have programs in place to prevent foreclosure situations where conventional mortgages do not.

Source:

Fixed-Mortgagerate.com:FHA vs. Conventional Loan Financing

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