Weighty Mortgage Decisions:

You’ve found the perfect home. Now, you need to figure out what type of mortgage to get, and weigh the relative advantages of an FHA loan versus a conventional loan.

The first path borrowers usually take is to seek out a conventional loan, because it offers the best interest rates; but not everyone can qualify for a conventional loan. If this is the case, FHA may present an alternative. A conventional loan typically requires a substantial down payment. If a down payment is less than 20 percent, primary mortgage insurance will usually have to be obtained in addition to the conventional loan.

Conventional loans also require excellent credit, income qualifications, and a low debt-to-income ratio. If a borrower qualifies for a conventional, Fannie Mae approved loan, this is usually the best option, since the interest rate will be somewhat lower than that offered by the FHA.

The requirements for an FHA mortgage are easier than a conventional loan. The borrower must have only a three percent down payment, and the money may be a gift. Conventional loans require at least five percent to be in the borrower’s own funds when making the down payment. In addition, FHA borrowers also must pay a monthly mortgage insurance premium, equivalent to one half of one percent of the total loan amount, divided by 12 months. Closing costs can also be rolled into the loan amount to be financed.

Income requirements are also easier with an FHA loan, borrowers may have a higher debt-to-income ratio, and borrowers may qualify with alternative credit references. In general, an FHA loan is best suited for low- to moderate-income borrowers with fewer resources.

If you cannot qualify for a conventional loan, FHA may be an excellent option; however, if the resources are available, and you qualify, the conventional option is usually preferred.