Yale Roth M.A., M.Ed

I get a lot of people asking me ”should I take out an FHA mortgage.”  The short answer is “it depends.”

FHA mortgages provide many benefits over conventional mortgages; however, the FHA mortgage is designed for a certain borrower profile.

An FHA mortgage would be the right mortgage if you’re buying a new home and you only want to put down 3.5% as a down payment.  This doesn’t always apply to first time home buyers.  FHA mortgage are available for those who’ve already owned a home before – however, you cannot use a FHA mortgage for a second home or rental property.

A conventional mortgage requires 5% down payment and very good credit scores.

An FHA mortgage allows you to have mediocre credit.

In the “old” days, credit scores weren’t even a consideration for a FHA mortgage.  Now most lenders won’t do a FHA mortgage with credit scores below 620.  It’s going to be tough to qualify for a conventional mortgage with a 620 credit score.

An FHA mortgage would be the right mortgage if you’ve filed bankruptcy between 3 and 7 years ago.  You won’t be eligible for a conventional mortgage with a bankruptcy filing within the past 7 years.

If you want to take the maximum mount of cash out of your home, the FHA mortgage will allow you to take cash out to 85% of the value of your home.  On a conventional mortgage, your capped at 80% of the home’s value.

So, in conclusion, if you’re credit profile is good, you have equity in the home (if you’re refinancing) or if you’re putting down more than 5% on a home purchase, it is cheaper for you to go into a conventional mortgage.

I talk to borrowers who have great credit scores and have a relatively low loan to value ratio who are advised by loan officers or mortgage brokers to take out an FHA mortgage.  WRONG ADVICE.

Either the mortgage loan officer doesn’t know what they’re doing or they’re trying to maximize their commission (as they will be paid more on an FHA mortgage) – all things being equal.

Again, the mortgage terms are better on a conventional mortgage (which is a mortgage that is bought by Fannie Mae or Freddie Mac) if you have a good credit rating and equity in your home.

For those of you who have filed bankruptcy between 3 and 7 years ago, have mediocre credit or have little equity in the home, the FHA mortgage is the better loan type.

Related Posts:

• FHA Mortgage FAQ – What’s The Difference Between An FHA Mortgage And Conventional Mortgage?
• Mortgage Services ALERT! Mortgage Rates Rise. August 29, 2011
• Can You Get A Mortgage Loan After You’ve Had A Bankruptcy?
• Mortgage Refinance Questions – HARP? Is It For You?
• FHA Mortgage Questions – “What Is A FHA Streamline Refinance?”