Which program is better?

Since Fannie Mae came back with their 3% down program and FHA allows 3.5% down – which is better?  There are reasons to use both programs.  It will depend on your own circumstances and there are reasons for both programs!

FHA allows you to buy with a credit score of 580 although many lenders want to see a minimum of 620 or higher for FHA loans.  Conventional loans typically require at least a 620, but frequently lenders want a 640 or higher score- sometimes as high as 680 for 3% down.  FHA allows you to buy with 3.5% down as soon as 3 years after a foreclosure.  Conventional loans usually will need about 7 years after a foreclosure.  So if you have a lower credit score or have had a bankruptcy or foreclosure, FHA will probably make more sense.  For some it's the only choice due to previous foreclosures or even bankruptcies.

FHA has an upfront mortgage insurance, conventional does not.  FHA has a monthly mortgage insurance premium, so does conventional – unless you put 20% down.  FHA's mortgage insurance will not go away.  Conventional loans may have a lower mortgage insurance premium and the MI will go away after 5 years or when you pay the loan down to 80% loan to value.  For those that will be in the home long enough to pay down your mortgage, conventional loans may make more sense.

FHA interest rates are typically lower than conventional rates.  For those that are going to be in the home for a shorter term, it may make more sense to use FHA over conventional loans.  Conventional interest rates and mortgage insurance will vary based on your credit score.  The higher your score, the lower the rate and the mortgage insurance.  

Both programs allow you to use gift money for the down payment. FHA does require more documentation from the donor than conventional loans do.  FHA loans are assumable so as interest rates increase, your FHA loan can be a nice selling tool.  If you are looking at condos, make sure the condo is FHA approved – otherwise you may have to use conventional financing.

The best way to figure out which loan makes more sense will be to compare the two side by side.  Look at the payments and think about how long  you will be in the home.  Then you can decide which loan makes more sense for you!  For some people it's an easy decision, for others it will be based on your long term plans. Both are good programs, so it just depends on what makes more sense for you.

Leslie Vanderwerf,  NMLS ID#335509, American Mortgage & Equity Consultants, Inc, An Equal Housing Lender, NMLS#150953 - Email - Website

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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