Conventional 97 or FHA – which loan to choose?

Now that FHA has lowered their mortgage insurance to .85 from 1.35% and Fannie and Freddie have come out with a 97% program, which is better?  It depends on your situation.

For those that have been credit scores, conventional may be better.  The higher your credit score, the lower your interest rate and mortgage insurance on conventional loans.  Another huge benefit is that with a conventional loan, at some point you will get rid of your mortgage insurance.

Typically conventional loans have higher interest rates and the mortgage insurance may be higher than FHA at 3% down.  So why use conventional financing over FHA?  If the seller is concerned about repairs (maybe peeling paint), they may not want to take a buyer with FHA financing.  If you are planning to be in the home for a long time, you may want to go conventional to get rid of the mortgage insurance.

FHA is great if you have lower credit scores as the mortgage insurance doesn't change.  The interest rate is typically lower than conventional financing.  If you have student loans with the payment currently deferred, you may want to choose FHA financing.  If you have had a foreclosure in the last 7 years, you may have to use FHA financing.  There is also an upfront mortgage insurance premium on all FHA loans. 

I just had a buyer that we were comparing the FHA financing and conventional, the difference in his payment was about $30 (conventional was higher).  However in his situation, it made more sense to go with the conventional loan for a couple reasons.  The seller had rehabbed this home, so he had not been in title for very long, so that was an issue with FHA.  They also were concerned about multiple offers and knew that a conventional loan was a stronger loan than FHA, so they used the conventional financing when they wrote the offer.

When you are making your decision about financing, talk to your loan officer and your realtor.  Decide which makes more sense.  There may be reasons to do one over the other – it may come down to the house you are looking at buying, it may have to do with the payment or there may be another reason.  Make an informed decision so you know what is best for you -make sure you ask the questions you need to so you can make the right decision.

Leslie Vanderwerf,  NMLS ID#335509, American Mortgage & Equity Consultants, NMLS#150953 – 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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