by Laurel Michaels

Created on: May 26, 2008   Last Updated: December 03, 2009

Are you thinking about buying a home? Low prices and motivated sellers can mean great deals in today's housing market. Before you start looking for a house though, you need to consider what type of mortgage loan is right for you. Namely, should you use FHA or Conventional financing? When you talk to your mortgage professional, they will likely tell you that an FHA loan is the better choice in the current market. Why is that?

FHA loans are loans which are insured by the Federal Housing Administration. Since these loans are insured, the banks that offer them can follow guidelines which are not as stringent as Conventional loans. FHA loans have often been the homebuyer's choice because they require only a 3% (of the purchase price) down payment, but they are especially popular now because they are not affected by declining markets. What does this mean?

In many areas of the country, home values have dropped, such as in Nevada, California, Arizona, Florida, Michigan, and many mid western states. These areas are called "declining markets" because values are or have been declining. Conventional lenders and the private mortgage insurance companies that insure them have limited financing to 90% of the purchase price in these markets. FHA loans, on the other hand, still allow 97% financing, even in declining markets.

If you haven't saved up a 3% down payment, FHA allows it to come from a gift from a family member or close friend, an employer, or your church. If a gift isn't an option for you, you might also look into state programs for down payment assistance. These are usually in the form of a second loan with a 20 year term and a fairly low interest rate. These State programs are often only offered through certain approved banks and you will likely have to meet income and asset restrictions to qualify. For more information on down payment assistance programs go to http://www.hud.gov/offices/hsg/sfh/np/sfhdap01.cfm. You can also look for information through your State's housing authority.

In the current housing market, most sellers are willing to pay most or all of the buyer's closing costs. Conventional loans cap this amount at 3% of the purchase price if you are putting less then 10% down. FHA, however, allows the seller to pay up to 6% towards the buyer's closing costs. That could mean no out of pocket expenses to you as a buyer. It may even be enough to buy down your interest rate.

Besides requiring less money down, FHA offers other considerations for buyers. Mortgage

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