Comparing FHA Financing to Conventional Financing for Owner Occupied Homes

It was 1934, the time of the Great Depression. Franklin D. Roosevelt had been elected President 2 years earlier and he started to establish programs to help the economy and unemployment. These were referred collectively as "The New Deal".

The U.S. Government felt that, as part of "The New Deal", a federal program was needed to increase new home construction and thereby create jobs. This is how the Federal Housing Administration (FHA) was established. This new program did create quite a few jobs and, consequently, the FHA was off and running.

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During the mid 1960s the FHA started to change. They stopped being only an insuring agency for loans and broadened their scope to include the administration of an interest rate subsidy program along with other aid for the home buyer. The Civil Rights Act, also known as The Fair Housing Act of 1968, added to the FHA's ongoing transformation away from being only a mortgage insurance program.

In 1974 the Housing and Community Development Act came into effect. This act significantly changed the Government's role in many aspects of housing and community development. It also made significant changes to the magnitude of the FHA's activities. Changes to this act, going forward from 1974, brought the FHA to the point where it is today.

For the purposes of this article I will only be addressing the advantages of an FHA insured loan when compared to a conventional loan. The criteria for this loan example will be a single family home being owner occupied.

It should be remembered that the FHA doesn't make loans or build houses. It only insures loans offered by private lenders. Mortgage insurance protects lenders against losses that result from defaults on home mortgages by buyers.

This insurance makes it possible for a buyer who cannot qualify for a conventional loan to still be able to buy a house or condominium. Townhouses and condos must be in a HUD approved complex to qualify for FHA insurance. Currently a little over one third (33.3%) of all home purchases in the U.S. are backed by an FHA loan.

There are 3 basic types of dwellings that qualify for FHA mortgage insurance. These are Single Family Real Estate Homes (SFR) - this includes Manufactured Homes (Mobile Homes), Condominiums or Townhouses in HUD Approved Communities and Public Urban Developments (PUD).

A common misconception is that the FHA buyer assistance programs are only for first time buyers. This is not the case. Any prospective home buyer can use an FHA insured loan as long the buyer doesn't have a current FHA insured loan in their name. If they do have an FHA insured loan in their name that loan must have a Loan-to-Value (LTV) ratio of 75% or less. To find your LTV ratio divide the total amount of money that you owe on your home by the appraised value of your home.

You can own rental properties as long as none of them have an FHA insured loan in place at the time you apply for your new loan. As a general rule the FHA insured loan program may insure loans with 5% down payment or, often times, less than that. This is based on the purchase or appraised price of the new home, whichever is the lower. A conventional loan usually requires a 20% down payment.

On a condominium or house that appraises for $150,000.00 the FHA insured loan would require $7,500.00 down at 5% while with the conventional loan the required down payment would be $30,000.00 at 20%. It should be noted that the FHA has additional programs, when combined with their basic loan guarantee, can often reduce the required down payment to substantially less than 5%.

The maximum loan amount will vary and will depend on what state and county the property is located.

Use this link to see the loan limitations for your property by state: This does not apply to Manufactured Homes which have the same limits in all locations - $69,678.00 for a Manufactured Home only, $23,226.00 for just a lot and $92,902.00 for a Manufactured Home with a lot.

In most cases you will have lower closing costs with an FHA insured loan as opposed to a conventional loan. The FHA determines what closing costs can be charged to the borrower at the federal level. The local FHA office specifies the amounts of these fees. This determination is based on what the local office feels the amount charged for these services are reasonable and customary for their area.

The fees that can be charged to the buyer are:

• Lender's origination fee
• Deposit verification fees
• Attorney's fees
• The appraisal fee and any inspection fees
• Lender's origination fee
• Cost of title insurance and title examination
• Document preparation (by a third party)
• Property survey
• Credit reports (actual costs)
• Transfer stamps, recording fees, and taxes
• Test and certification fees
• Home inspection fees up to $200

Any other costs are generally not allowed, by FHA rules, to be charged to the buyer and are usually paid by the seller. These FHA allowable charges can, and do, change so check with the FHA, your lender or your agent to get the current list.

A buyer can qualify for an FHA insured loan with a much lower credit score than a conventional loan requires. FHA rules governing credit scores state that any application made after October 4, 2010 where the applicant has a credit score of 580 or above is eligible for the maximum amount of FHA financing available. Borrowers with credit scores of 500 - 579 are eligible for 90% LTV.

The FHA credit rules have just recently gotten stricter. What was acceptable a year or two ago is no longer in effect. FHA loans still offer more leeway in their terms and conditions than most conventional loans.
Interest rates on FHA loans are competitive but, due to the volatility of today's mortgage market, rates can and do change often. Check with your lender, broker or agent to get the latest rates.

FHA rules are subject to change. These were the guidelines at the time this article was written - November 11, 2011. Please check with the applicable agent or agency to ensure that they are still current before making any buying decisions.

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