It may not always seem clear whether to apply for a FHA loan or conventional loan.

FHA loans have typically been known as loans for first-time homebuyers, filled with extra paperwork and complexity since it’s a government-insured program. Borrowers can use multiple FHA loans for purchasing or refinancing a home loan. However, FHA loans usually may not be used for second homes or investment properties, unless they have been approved by one of the centralized offices of Homeownership Centers (HOC).

As a borrower, the additional paperwork for FHA loans is minimal and probably undetectable. The appraiser does have an additional duty to point out any health and safety hazards that are present and require them to be repaired prior to closing. The difference in processing time required for FHA loans – as compared to conventional loans – is negligible.

The major advantage to selecting an FHA loan is that easier credit standards must be met to obtain financing. Typically, FHA requires a low-down payment amount, lower credit scores are allowed, less elapsed time is needed for major credit problems (foreclosures and bankruptcies) and, if needed, you can use a non-occupant co-borrower (who is a relative) to help qualify for the loan using blended ratios. Blended ratios are debt-to-income ratios that equally blend the borrower’s and non-occupant co-borrower’s income and monthly payments to qualify for the loan.
 
Except for Fannie Mae’s HomeReady mortgages, conventional loans do not allow non-occupant co-borrowers.

FHA loans also have some nice features that conventional loans do not. FHA loans are eligible for “streamline refinances” – which is a less expensive and quicker way to refinance your loan into a low interest rate.
 
FHA loans are normally priced lower compared to conventional loans.

FHA loans are also assumable; and this may be a particularly a good future resale point if the borrower would have an existing low interest rate on the home they are selling. That interest rate and mortgage balance can be assumed by a new buyer. Conventional fixed rate loans do not offer this feature.

Conventional loans also have advantages in certain situations. If you make a 20 percent or more down payment for your home, you will not have to pay mortgage insurance to obtain your loan.

With an FHA loan – no matter the amount of down payment – requires an upfront premium and also a monthly premium.

For Conventional loans, even if you put down less than 20 percent, the monthly private mortgage insurance (PMI) charged to obtain the loan could potentially be a lot less than the FHA premiums and even less if your credit is good. And there is NO up-front mortgage insurance premium, like FHA requires.

Private mortgage insurance (PMI) is not only credit-sensitive, but it drops off much more quickly than FHA insurance at lower loan-to-value ratios. Conventional mortgage insurance will fall off automatically when the loan is paid down to 78 percent loan to value (LTV), whereas the FHA premiums will exist throughout the life of the loan (in many cases) if the down payment was less than 10 percent.

When can you drop PMI on an FHA loan?

To eliminate the annual mortgage insurance premium (MIP) on an FHA loan, you can either:

• Wait for MIP to expire — If you put down at least 10% when you bought the home, your FHA MIP expires after 11 years.
  
• Refinance into a conventional loan — Replacing your FHA loan with a conventional loan eliminates the FHA’s MIP requirement. This is the only FHA MIP removal option if you put less than 10% down.
  

• July 1991-December 2000: If your origination date falls between these two markers, you can’t cancel your FHA mortgage insurance premiums.
• January 2001-June 3, 2013: Your MIP will be canceled once you reach a loan-to-value ratio (LTV) of 78 percent.
• June 3, 2013-present: Your MIP will only be canceled once your mortgage is paid in full unless you made a down payment of at least 10 percent. If so, your MIP will be canceled after 11 years.

Conventional loans can also be used to purchase investment property and second homes. If a Conventional loan exceeds the maximum conforming loan limit (varies by county) – it is considered a Jumbo Loan.

Compare Advantages and Disadvantages of each loan