FHA or conventional mortgage???

Which makes more sense for you as a buyer? FHA or conventional?  Everyone is a little different and with the higher upfront mortgage insurance required by FHA, it pays to do a little research.

If you have less than 5% available for down payment, you will want to go FHA.  FHA still only requires 3.5% down where conventional loans will require 5% down typically.  If you have over 20% down, conventional loans are the way to go.  Anyone in between 5% and 20% down will want to work numbers to see what makes more sense to do.

FHA loans require an upfront mortgage insurance premium of 2.25% and a monthly insurance of .55%.  Conventional loans require PMI and the rate varies depending on the down payment.  At 5% down, the monthly rate is .67% with one company as long as you have a 720 credit score.  With 10% down, the PMI rate is .49% with a 720 credit score.

If your credit score is below 660, you will want to go with a FHA loan unless you have 20% down because the mortgage insurance companies won't issue mortgage insurance.  On a conventional loan, your credit score will affect your interest rate.  If you have a 740 score, you will get the best rate – below that there are add-ons to the rate.  That is another area to compare FHA to conventional to make sure you are getting the best rate/program for your situation.

FHA mortgages are also assumable.  That means when you sell your house, if interest rates are higher, your buyer can assume your mortgage and you get a release of liability.  The benefit to you is a possible way to sell your house quicker and the benefit to the buyer is a lower interest rate!

FHA mortgages require you to keep your monthly mortgage insurance until you have paid the mortgage down to 78% of the original purchase price and typically require it for a minimum of 5 years.  Conventional loans require that you keep mortgage insurance until you have 20% equity in the home, but you can use the increase in value to get to that 20%.  In the past, that didn't take too many years depending on fast the values increased.  We know homes are increasing in value, but it may take a few years to get that 20% now.  You will have to keep your mortgage insurance for at least 2 years.

The easy answers are there for those with less than 5% down or a minimum of 20% down!  Anyone in the middle of those numbers needs to talk over their scenario with their loan officer to see which program makes more sense.  I have had some buyers that I have approved for both FHA and conventional loans in case there was a home that had to go with conventional financing due to the seller's requirements.

Leslie Vanderwerf, Advisors Mortgage - EmailWebsite

Written By

Currently a Senior Loan Officer at Cross Country Mortgage LLC, it's hard to believe I have been in the mortgage business for more than 25 years and have worked with Sharlene since 2000! I love sharing mortgage insights here each week and helping people finance their homes. Listening helps me find the right program for you!

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