One more thing, if you are putting down less than 20% and need PMI on a conventional loan, your total debt ratio cannot exceed 41%, where it can go as high as 50 for FHA, as long as it gets approved by the desktop underwriting system. You can also be approved with a lower credit score than conventional PMI will allow. Also, with FHA, with less than 20% down, the entire down payment can be gifted.
Give us an idea of what type of property you are buying, and what your specific deal is, and we can guide you better.
Yes, the main difference is that one - the FHA - is a government loan but there is much more to the story. A primary reason that a borrower will go FHA rather than Conventional is because FHA allows a lower down payment, 3.5% or 5.0% rather than conventional. FHA loans generally take longer to process. Also, FHA loans include a "amendatory clause" that stipulates that the property must appraise at the purchase price - if it doesn't then either the buyer can cancel or one or both parties must make up the difference (if the buyer - infuse more cash; if the seller - renegotiate the price). You can begin to get the picture of why a seller, faced with the choice of a FHA or a Conventional Buyer would choose the later.
Now a new wrinkle that is really impacting my efforts is the change in the FHA rules effective Feb 2010 that no longer allow "spot approvals" for condos/townhomes - this means that unless the development is approved you may run into issues, and at a minimum delays.
It is not getting any eaiser....
I hope this has been helpful.
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Some very thorough answers below. The way I can sum it all up:
"An FHA loan is a loan of necessity and a conventional loan is a loan of choice."
Let me know if I can help further.
I am assuming by your question that you are an FHA buyer. Frankly, if you are pre-approved with your lender, your offier shoudl be considered equally as strong as a conventioanl buyer. When I say pre-approved, I means that your lender has run your credit, and personally reviewed all of your income and asset documentation, and then run your application through an automated underwriting engine to get an approval.
To answer your question, most of the differences are outlined in the other posts below, but to summarize, here are the benefits of FHA over conventional:
* as little as 3.5% down (many buyers have great jobs and credit, but little cash saved)
* credit as low as 640
* allows for non-occupant co-borrowers (a.k.a. mom, dad, family)
* typically interest rates about .25% lower than conventional
Of course, these benefits come at a cost, and that cost is called Mortgage Insurance, but in the form of a one time up front fee (that can be financed) and a monthly fee. But, if this is your only option to get into a home today, while rates and home prices are low, FHA is a great solution. If you have 20% down and are not cleaning out every bank account to come up with that 20% down, conventional loans are great too. But I even have buyers who have 20% down, but choose to only put 10% down and go FHA, so they still have a financial cash cushion.
I disgree with the comment that FHA loans take longer. I find that my FHA purchases close just as quickly as my conventional purchases. I also am disappointed to hear that many lisings say they will not take FHA loans. Unless the home is considered a health and safety hazard by FHA (not all toilets working, no running water, missing stove or heater, etc), then there is not reason that a listing should discriminate against an FHA borrower. In my opinion, just as many things can go wrong with a 20% down buyer as with an FHA buyer.
Finally, Jeanne does bring up a big issue that FHA now has with condos. Unless the condo project is FHA approved, FHA loans are not a good option to buy a condo. But to be clear, if the home is a PUD, you can still go FHA. Most loan agents can help you figure out if a condo project if FHA approved or not.
I wish you the best in your home purchase endeavors!
There are several other very important differences besides who backs up the mortgage. There is also a difference in down payment requirements, and the fact that FHA mortgages requires mortgage insurance premiums added to the monthly mortgage payments.