Once you know the difference between the two mortgages, you can decide which is better for you! Both are typically fixed rate 30 year mortgages.
There are several differences between both loans. FHA allows for 3.5% down payment regardless of whether the property is a single family, duplex, 3-4 unit or condo, as long as it is owner occupied. Conventional loans usually require a minimum of 5% down (there are some exceptions for 3% down). If you are buying a duplex, you need 15% down and for a 3-4 unit, you need 25% down.
Another big difference is mortgage insurance. FHA requires an upfront mortgage insurance premium of 1.75% added to your mortgage, plus a monthly premium of 1.25% with less than 5% down. If you put 5% down the monthly premium is 1.20%. FHA requires you to pay mortgage insurance until you reach 78% of the original purchase price and for a minimum of 5 years. Conventional loans do not require an upfront mortgage insurance premium but do require monthly premiums unless you put 20% down. The monthly premium will vary based on credit scores and down payment, typically it is cheaper than FHA premiums. Conventional loans will sometimes allow for an option of a one time mortgage insurance premium paid at closing. Sometimes that is the best option if the buyer has money for the premium. Ask your loan officer if that is an option and if it makes sense for you. They can calculate a break even point for you to see if it makes sense or not. When I have used this program, it usually takes 2-3 years for the buyer to break even. The benefit to that program is that there is a not a monthly premium. Conventional loans require you to pay mortgage insurance until you reach 80% loan to value, but they will also allow for increase in value.
Interest rates will vary with both programs. Lately FHA loans have had lower interest rates than conventional, but that can change. Credit scores also affect your interest rate, especially with conventional loans. Typically you will need to be above 680 to get the best FHA rates, for conventional you need to be above 740. Both programs typically require a 640 credit score. There are a few lenders that will allow FHA loans down to a 580 score, but they are harder to find and may have additional requirements.
FHA mortgages allow for gift money, the entire down payment can be a gift. Conventional loans require you to have 5% of your own money into the transaction. If you have a gift of 20% down, you can use that on conventional loans and not need 5% of your own money.
FHA mortgages only require 3 years after a foreclosure, conventional loans require 5-7 years after foreclosure.
The easiest way to determine which way to go is if you have less than 5% down, plan on FHA, between 5 and 19.99% down, talk to your loan officer and make a decision. If you have 20% down, usually conventional loans are the best option.
Leslie Vanderwerf, NMLS ID#335509, American Mortgage and Equity Consultants – Email –
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