The Federal Housing Administration (FHA) offers a loan guarantee program that can provide borrowers with several advantages over conventional loans, including lower down payments and easier qualification guidelines. But how do you know which loan program is right for you?

Down Payments

One of the most notable advantages of FHA guaranteed loans is the very low down payments required. Generally only 3% is needed, as opposed to 5-20% for conventional loans. Plus, with a FHA loan, 100% of this down payment money can be a gift from a relative, or nonprofit organization, which isn't always the case with conventional loans.

Mortgage Insurance

Conventional loans require Private Mortgage Insurance (PMI), a monthly expense, when the borrower does not provide 20% or more of the home's value in a down payment. FHA loans also require insurance, generally 1.5% of the loan amount at closing in addition to.5% annual renewal fee, which can be a large expense for the homeowner. Unlike private mortgage insurance, which can be canceled when the borrower has 20% equity, the FHA insurance will remain for the life of the loan.

Qualifying Standards

The guidelines that lenders follow to make FHA loans are not as stringent as the guidelines set out for typical conventional loans. These more relaxed guidelines are not as strict about past bankruptcies or foreclosures, and they allow higher debt to income ratios for borrowers.

Transferability

Most conventional loans are not assumable, meaning that when you sell your home, the loan must be paid off in full. However, with FHA guaranteed loans, they are generally assumable, meaning that the new home owner can take over the monthly payments under most circumstances.

For a first time home buyer, the FHA loan programs are a great opportunity to qualify for a purchase that may have been difficult without the support of the FHA. It's important to point out, however, that the FHA does not make loans themselves, they simply provide the lenders with guarantee under their program.

Overall, the main advantages of an FHA loan are the easier qualifying standards and the lower down payment required. In exchange for this, however, the borrower will be paying an insurance premium for the life of the loan.