The Lawhead Team knows there are many different types of loans one can apply for when buying a house. We would like to compare the two most common loans, Conventional loan and FHA loan, for our readers.

An FHA loan is a loan which is backed by the federal government and issued by participating lenders. With a conventional loan there is no such guarantee and the risk is assumed by the lending bank or other loan stakeholders.

A conventional loan lender will follow stricter Fannie Mae and Freddie Mac underwriting guidelines which require good credit, strong financial status and lower loan-to-value ratios. On the other hand, because of government intervention with an FHA loan, you must go through a more complicated approval process.

Conventional Loans vs. FHA loans –

• FHA loans only require a down payment of 3.5 percent which can be funded using borrowed or gift money while a conventional loan requires at least 10 percent down.
• To qualify for a conventional loan you must have a credit score of at least 620 however anything below a 740 will result in higher mortgage payments.
• Because a conventional loan requires a higher down payment, the borrower will be able to build equity faster. Because FHA loans require a comparatively lower down payment, borrowers are required to pay a mortgage insurance premium (MIP).
• FHA loans are suitable for applicants with bad or no credit. Conventional loans are suitable for those with sufficient cash and healthy financial conditions.
• FHA loan borrowers are required to pay a 1.5 percent upfront fee and a monthly 0.5 percent premium for the FHA mortgage insurance, which is designed to protect lenders from losses arising from mortgage defaults.

Homeowners whom are looking to borrow a large amount of money or who do not have good credit will often look to a home equity loan.

Home equity loans are sort of like a second mortgage, not to be confused with a home equity line of credit.  Lenders view home equity loans as relatively safe as you can not disappear with your house or hide it if you default on your loan.  Because of this, the lender has a pretty good chance of collecting the collateral.

Typically home equity loans are attractive to borrowers for a few reasons.  Most of the time, they have a lower interest rate and are easier to qualify for if you have bad credit.  In addition, the payments on a home equity loan may be tax deductible and borrowers can get relatively large loans with this type of loan.

Borrowers usually use a home equity loan for larger expenses in life.   Most of the time it can be used to remodel or renovate your house.  However, homeowners can also use home equity loans to pay for a family member’s college education or finance the purchase of a second home.

There are some pitfalls of home equity loans and all borrowers should be aware of this.  The main pitfall is that you run the risk of losing your home if you fail to meet the payment schedule required by the loan.  Another danger is that scammers have found plenty of ways to cheat homeowners out of their most valuable asset.  Make sure you know who you are doing business with.  If the offer for a home equity loan seems like a high pressure sales pitch with the inability to put things in writing, take a step back and analyze the deal.