When Is an FHA Loan the Best Choice?

With the different number of financing options available these days with which to purchase a home, the Federal Housing Administration (FHA) loan may be the right choice for you as it has lower credit score requirements than does its conventional mortgage counterpart.

Following is a comparison of some of the features of both types of loans:

With credit score requirements much higher than they were even one year ago, if you want to go with conventional financing but are below the minimum of 720, you will wind up paying a premium to the lender, and often a hefty one.

If you go the FHA route, the minimum score you are looking at will be around 640.

FHA has lower score requirements, but the individual lenders can and do set their own minimums based on the risk they want to take. Some will go lower than 640 but will undoubtedly charge a premium for this extra risk.

Downpayment and asset reserves are another area where you might fare better with an FHA loan than a conventional one.

The minimum downpayment for FHA is 3.5%, whereas the minimum on conventional is 5%.

Conventional mortgage guidelines call for two months of asset reserves at closing, meaning two months of mortgage payments, including taxes and property insurance.

FHA has no reserve requirements.

If there is one drawback with FHA it is the cost of doing the loan.  Unlike conventional loans, there is a 2.25% up-front mortgage insurance premium.

The good news, though, is that it can be rolled into the loan.

All FHA loans have a monthly mortgage insurance premium, regardless of the downpayment, as do all conventional loans where there is either less than 20% down or less than 20% equity in the property in the case of a refinance.