Which mortgage makes more sense for you? It depends on a lot of different information. With FHA increasing it's monthly mortgage insurance premiums, it is time to compare both mortgages and see what works for your own situation.
There are two factors that play into the answer and they are credit and cash. If you have a good credit score (ideally over 740), conventional may make more sense than FHA. If you have a credit score under 700, especially under 660, it will probably make more sense to go with an FHA loan. You will want to have at least 3% down for a conventional mortgage, but 5% is better. At 3% down, it probably makes more sense to go with an FHA mortgage.
For a conventional loan, you will want your debt to income ratios to be at 45% maximum, ideally 41%. You will want your credit score to be over 700, ideally over 720-740. You should have access to 5% for down payment, plus 2 months of reserves available. Your monthly mortgage insurance premium could be as low as .78% (compared with FHA at .90%).
For an FHA loan, you can have higher debt to income ratios – usually a maximum of 50%. Your credit score can be much lower – down to 640 (sometimes lower, depending on the investor). You only need 3.5% for down payment. You can ask the seller to pay up to 6% in seller paid closing costs.
Mortgage insurance is required unless you have 20% down on a conventional loan. There are a couple options that may work for you with a conventional loan if you have the money available. Monthly MI payments have been used the most over the last few years. However, lately we have been looking at an upfront single premium for mortgage insurance. An example would be with a 760 credit score, a mortgage of $150,000, the single premium would be 1.95% (or $2925). If you had monthly mortgage insurance on the same mortgage, your monthly payment would be $97.50 (.78%). If you lived in the house and kept the same mortgage for 2 1/2 years, it would make sense to use the single premium payment. The monthly mortgage insurance premium will go away once you get 20% equity in the home, but with home values staying the same right now, it will be several years before that happens. By using the single premium, you eliminate the monthly MI payment and that will help lower your monthly cost.
The same $150,000 mortgage with an FHA loan would have an upfront mortgage insurance premium of $1500 plus a monthly payment of $112.50 and in April, it will go even higher.
If you know you have good credit and you have the ability to make a down payment of at least 5%, you may want to ask your loan officer about using a conventional mortgage instead of FHA. If nothing else, compare both programs and see which one works better in your own situation!
Leslie Vanderwerf, NMLS ID#335509, Advisors Mortgage - Email – Website
