Should I Do An FHA Loan Or A Conventional Loan?
A listener asks what the difference is between a conventional home mortgage and an FHA loan.
Answer: An FHA loan is guaranteed by the federal government through HUD, the Housing and Urban Development Department. The federal government guarantees the lender that if the house is foreclosed on they will buy it. For example, if Citibank has a $100,000 FHA loan and they foreclose on the house, the government will buy it from them for $100,000. That way Citibank doesn’t lose a dime. A lender is 100% covered in the case of a foreclosure with an FHA loan.
A conventional home mortgage does not have a government guarantee – it usually has a private mortgage insurance guarantee. This usually requires a larger down payment and is actually a cheaper loan as far as interest rates and fees are concerned.
I don’t recommend an FHA loan because they are more expensive. A conventional, 15-year fixed mortgage is the way to go.