With all the changes going on with mortgages, especially FHA, it's a good time to look at the differences and see which one might be better for you. Both are 30 year fixed rate mortgages and both also offer adjustable rates as an alternative.
Interest rates don't vary as much with FHA as they do with conventional loans. FHA does have an adjustment to the rate if your credit score is below 660 and another one below 620. Conventional mortgages with credit scores over 740 have the best rate, as your score drops, the rates increase due to risk factors. On a conventional loan with a score of 660, your rate may be as much as .375% worse than if your score is a 740.
Conventional loans with 20% down do not require mortgage insurance. All FHA loans require mortgage insurance. As of October 4th, FHA loans will require a 1% upfront mortgage insurance and a monthly payment of .90% based on the mortgage amount. Conventional mortage insurance varies depending on the MI company, but is highest with 5% down. There is not an upfront MI, but the monthly with a credit score of 700 is about .78% of the mortgage amount. So a mortgage of $200,000 with a conventional loan would have a MI payment of $130/mo and a FHA mortgage would have a payment of $151.50/mo.
Conventional mortgage insurance drops as you put more money down, which can also help. Another option is to use a one time MI payment at closing and depending on your situation that may be your best option. Conventional MI will also go away once you have 20% equity in the home as long as you have had MI for at least 2 year. FHA mortgage insurance is there until you pay your mortgage balance down to 78% of the original mortgage amount.
One benefit to FHA loans is that they are all assumable with qualifying and that can help you when you sell your home. Conventional loans are not assumable.
FHA loans are more credit friendly than conventional – many investors are requiring a 660 credit score for conventional loans, but only a 620-640 for FHA.
Which one is better? It depends on your situation. If you have can't put more than 3.5% down, FHA is your best option. If you have 20% down, conventional loans are better. If you are in between those amounts, talk to your lender. Other factors that may make a difference are credit score, income, debt ratios, and the property type.