Types of Mortgages

FHA Home loan information

FHA home loans are a great way to purchase or refinance your next home. When it comes to mortgages there many different possibilities for financing. The best way to decide which type of loan is best for you it to be informed and educated about all the different types of loans available (FHA and Conventional). Here is some valuable information about FHA home loans.

A FHA home loan is a mortgage that is insured by the Federal Housing Administration, a United States government agency.  FHA loans were designed by the government to allow lower income families an opportunity to purchase a home. Today FHA home loans allow borrowers to purchase homes with smaller down payments, less than perfect credit and higher debt to income ratios. There are disadvantages of FHA loans including PMI or mortgage insurance, more strict property requirements, maximum amount a loan can be, and possible additional income tax penalties if you sell the property too soon.

Before you decide which type of loan to pursue consider all the pros and cons of each type of loan.

Conventional loan

Conventional loan defined
 A conventional loan is basically any mortgage loan that is not insured by the federal government or the FHA (the Federal Housing Administration). A conventional loan was the first type of traditional mortgage loan made by lenders. It was basically a fixed rate mortgage for the entire period of the loan. Lenders basically loaned the money to borrowers and the loan was kept open until the loan was paid in full. It was a great way for the borrower to create a relationship with the lender, but often times weren’t the best financial move for lenders. If interest rates rose, lenders were stuck receiving a lower return rate on their money.

Types of conventional loans
There are many types of mortgage loans that are considered conventional loans. A few examples include conforming loans, nonconforming loans, and jumbo loans. A conforming loan is a mortgage loan that conforms to GSE guidelines. Nonconforming loans fall outside the GSE guidelines because of bad credit, lack of collateral backing the loan, or the loan is over a certain amount of money. Finally, a jumbo loan is a loan that large to be financed by normal mortgage trading companies. This amount is currently just over $400,000.

Pros and Cons of Conventional Loans

Pros

• Lenders will be more flexible with lending fees
• The lender may take into consideration other collateral other than the property being mortgaged
• A lender may consider other personal property included in the property as part of the home value
• Appraisals will be more lenient
• The lender may self insure the loan
• A higher interest rate may be considered in exchange for lower closing costs

Cons

• Usually require larger down payments
• The lender sets their own interest rates
• Though lenders can be flexible with lending fees they can also charge more
• There may be some fees associated with paying off the loan early
• Require PMI if the LTV (loan to value) is greater than 80%
   

Other mortgage loan options other than a conventional loan

FHA loans are non-conventional loans. FHA loans are insured by the federal government and have many advantages over conventional loans. FHA loans usually require lower down payments, have more flexibility when it comes to the borrowers credit scores, and have lower PMI or private mortgage insurance.