How does an FHA loan compare to other loan types?
What's the difference between FHA loans & other mortgage types?
There are several types of loans available on the market today. These options expand your choices, but can complicate your research. To know exactly which option makes the most sense for your unique situation, you’ll want to compare the different loan options and understand the different benefits.
FHA loans—loans that are insured by the Federal Housing Administration—can be a great option for certain first-time homebuyers, buyers looking to make energy efficiency updates or those who may fall outside of some of the more traditional credit or down payment requirements.
Do you know that an FHA loan is the right solution for you already? You can apply today to get started on your mortgage or continue with a detailed breakdown of your options. But first…
How does an FHA loan work?
The Federal Housing Administration (FHA) insures the loan, which means your lender is protected if you were to default on your loan. Because of this, FHA loans have more lenient qualifications when it comes to reviewing credit scores and financial history, and often include options for both a low down payment and lower closing costs.
Typically, FHA loans have down payment options starting at 3.5%, a credit score of 580 or higher and can be used to finance or refinance a variety of homes, including:
- Two- to four-unit multifamily
- Certain manufactured homes
Some FHA loans can also be used for new construction or renovation. It's also important to keep in mind that you’ll need to choose an FHA-approved lender.
FHA vs. Conventional Loan
A conventional loan is as traditional as its name denotes. The most common loan, offered by most lenders, this type of mortgage is not backed or insured by the government but instead sold to Fannie Mae or Freddie Mac. Because of this, conventional loans are more difficult to qualify for.
Conventional options include both conforming and non-conforming loans, with conforming limits set by Fannie Mae and Freddie Mac and nonconforming jumbo loans for borrowers who exceed the limit by private investors.
FHA loan limits are adjusted every year and depend on the area where the property is located. If you’re looking at a particularly high-cost area, an FHA loan might exceed the loan limits. In other words, there isn’t a “jumbo” option for FHA loans, but certain areas have higher limits than others. It’s best to work with your loan officer to better understand the limits in the area you’re looking to make a purchase in.
Conventional loans can cut back on fees, with control over mortgage insurance and no premium or funding fees. An FHA loan requires mortgage insurance for the life of the loan, regardless of the amount of equity built up, whereas a conventional loan only requires private mortgage insurance (PMI) when your equity is below 20%. And unlike FHA loans, that are to be used for primary residences only, conventional loans can be used for second homes or investment properties as well.
FHA vs USDA Loan
USDA and FHA loans have similar end-goals: to make home ownership more attainable. While both types of loans offer a means to make homebuying easier for lower income families, USDA loans are geared toward rural communities and have strict limits on household income and property location.
Backed by the U.S. Department of Agriculture, USDA loans also tend to have more lenient terms, as this offers a lender protection if you were to default on your loan. There are multiple types of USDA loans, ranging from single-family to multi-family housing to rural business. You can visit the United States Department of Agriculture for property eligibility specifics regarding each option.
FHA vs VA Loan
Guaranteed by the U.S. Department of Veterans Affairs, VA loans can be an excellent benefit for Veterans. The biggest difference here is that VA loans are only available to certain active-duty service members, Veterans, National Guard members and surviving spouses, while FHA loans have no service requirements.
Similar to the way FHA loans are insured, both types of loans offer some protection to your lender. Because the Department of Veterans Affairs guarantees a portion of VA loans, lenders can offer more favorable terms.
Benefits for VA loans include no down payment requirement (varies by lender), low interest rates, limited closing costs and no PMI, and can be used to both buy or build a new home as well as to repair an existing home.
Where can I get rates for an FHA loan?
While FHA mortgages offer more flexible approval terms, rates tend to be the same as or similar to a conventional mortgage. While FHA loans are available with fixed and adjustable rates, most FHA loans come with a fixed rate. If you choose a a fixed rate FHA loan, you’ll know exactly what your monthly payment will look like for the life of the loan.
If you think an FHA loan makes sense for you, you’ll want to be sure to work with an FHA-approved lender. The good news is that Guaranteed Rate is FHA-approved and has extremely knowledgeable loan officers in your area who can walk you through your options, see if you meet all the FHA mortgage requirements and help you find the perfect fit.
Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Restrictions may apply.
Guaranteed Rate has no affiliation with the US Department of Housing and Urban Development, the US Department of Veterans Affairs, the US Department of Agriculture or any other government agency.
Guaranteed Rate is an FHA Approved Lending Institution and is not acting on behalf of or at the direction of HUD/FHA or the Federal government.
If Applicant self-reports credit score as “needs improvement,” Guaranteed Rate will not run credit or provide credit scores via the Digital Mortgage. Applicant may request credit scores by contacting Guaranteed Rate.