If conventional loans are like square pegs for square holes, FHA loans have government backing that square’s the circle and helps put the round peg in that same square hole. There is a cost to this, so logically you don’t want to pay any more than you have to. FHA and similar government backed home loans are really only for people who require the extra help.
There is a best practice in borrowing money for your home as much as for anything else. Regardless of the options upfront you should always select the one that costs you the least in the long run and gives you the best terms. If money were no object there would be no need for mortgage lending of any kind.
Conventional Mortgages Leverage Equity
The cost of purchasing a home is a significant expenditure for even the most affluent. The tax code and simple economics make for trade-offs that depend on buyer needs and ability to pay. The risk in real estate is two-fold, first that you will be unable to pay and fall victim to foreclosure.
The second and recently a more common one is that the value of your home could go down instead of up. This was almost unheard of prior to 2008 but in the last few years it has caused a terrifying ride for homeowners. Many who refinanced or bought based on inflated appraisals then watched the value of their homes drop by even half and more, almost overnight.
Conventional mortgages are the optimum choice and will give the best terms to the buyer because you essentially pay cash to cover the risk. Your down payment of twenty to twenty five percent will give the kind of buffer of equity that assures lenders of loan repayment, one way or another. In economic terms this is the best practice for both residential and commercial real estate investment.
FHA Mortgages Make More Home Loans Happen
Loans sponsored by the FHA and other government institutions provide opportunity to those who cannot qualify for conventional financing. This might be because of a poor credit history or lack of cash for the down payment. The FHA has helped individuals as well as the nation to achieve greater stability and prosperity for the last eighty years.
There is a price for this support; the added risk of enabling homeownership for those in marginal circumstances has to be protected. That is the role of mortgage insurance, which FHA borrowers must pay to insure the balance of the loan as long as it is eighty percent of the principal or more.
Optimum Versus Necessary Borrowing
As a rule in life you don’t want to spend any more on purchases than you must. So, the time that you need a government backed home is when you can’t get a conventional loan on better terms.
If you require a loan that has a small down payment or a down payment that’s a gift from friends or family, then your only option might be an FHA mortgage. For everyone else, a conventional mortgage will work out better almost every time.