There are many questions regarding differences between standard or FHA mortgages. An FHA mortgage is not offered by the FHA (Federal Housing Administration), but is insured by that body. In effect, the FHA will underwrite a loan offered by a lender that would not normally have offered the loan. If a mortgage applicant is deemed too high a risk by regular lenders, it is possible for the FHA to insure the loan against non-payment.
In that respect, there is no such thing as an FHA mortgage – just a mortgage insured by the FHA. You will only have a need for such a mortgage loan if your FICO score is low and regular lenders have refused you. The FHA generally allows lower-income Americans to purchase their homes if their credit score is low – but not too low!
They are popular with first time buyers due to the low down payment – you can buy a house with a down payment of 3.5% upwards. It’s the ‘upwards’ that is determined by your personal circumstances. Let’s look at a standard mortgages first and compare it with the FHA mortgage.
A standard mortgage loan generally conforms to the guidelines set by Fannie Mae and Freddie Mac. A minimum credit score of 620 is generally required, although over 740 will get you a cheaper mortgage. When you get much below a FICO score of 740, then you may see your rate increase.
You may also be asked to come up with a down payment of between 5% and 20%. That is large spread, but the higher your FICO score, then the lower you should expect your down payment to be.
Fannie Mae and Freddie Mac set lending limits on borrowers according to their credit scores and personal circumstances. Those loans that conform to these limits are known as ‘conforming’ and those that do not are ‘non-conforming.’ These categories can be important when interest rates and down payments are set. Non-conforming loans are also referred to as ‘jumbo loans.’
The majority of standard or conventional mortgages are arranged with either fixed interest rates or adjustable rates. Fixed rates are typically arranged over 15 or 30 years. If you take a mortgage of less than 15 years you should be able to negotiate a lower interest rate. Rates can be fixed or adjustable, the latter being adjusted over agreed terms according to a published interest rate index.
The Federal Housing Administration insures loans that lenders might otherwise refuse due to the risk of non-payment. As stated earlier, the FHA does not offer mortgages itself – the body is not a lender but an underwriter in this respect. It enables lower income families to buy their own homes. It does this by reducing some of the costs involved in buying a home, and by accepting a lower FICO score than normal.
However, because the FHA does not actually lend the money, it is dependent on lenders agreeing to the loan. This is becoming more problematic, and while a FICO score of 450 may have enabled you to get a loan a few years ago, you are now looking at about 580-620 – or more for a low 3.5% down payment mortgage.
Standard Mortgage or FHA Mortgage?
You will likely not have the choice. The FHA mortgage helps first-time buyers and those on lower incomes. A standard mortgage requires a good FICO score and possibly a 10% -20% down payment. The lower your credit score the higher the down payment might be.
Since everyone is looking at a different set of circumstances in regards to their credit profile and mortgage needs, feel free to contact us directly with any questions you might have about whether an FHA mortgage or standard mortgages makes the most sense for you.