Buying a home can be a big decision and there are always lots of questions. One is what type of mortgage do you want? Until recently, it was very common to push conventional mortgages as the best way to go. Now depending on your situation, that may not be the case.
FHA and conventional mortgages are both great ways to finance your home. Which one is better will depend on your situation – what is your credit score? What is your debt to income? And how much money do you have to put down? Here are some things to consider when looking at both mortgages.
A conventional mortgage usually requires at least 3% down (for first time homebuyers or those that meet income criteria), otherwise you need 5% down. Ideally you want to have credit scores over 660 – many times you may need the score to be over 700, each file can be different. Your debt to income and any left over reserves (assets not needed in the transaction) will affect your loan approval. You can do a fixed rate loan or an adjustable rate. Ideally you want to keep your debt to income under 45%, sometimes you can go up to 50%.
FHA mortgages are backed by the government and insured by the Federal Housing Administration. Requirements tend to be less restrictive than conventional loans. You can be approved with a score as low as 580, sometimes even down to 500. Anything below 580 requires more down. Over 580 you need at least 3.5% down. Your debt to income ratio can go over 50%, sometimes as high as 56%.
One of the big differences between FHA and Conventional loans is the mortgage insurance. Conventional loans with 20% down or more do not require mortgage insurance. Anything less than 20% down requires either a monthly mortgage insurance or some type of upfront MI. This mortgage insurance will go away once you have enough equity in your home. FHA requires an upfront mortgage insurance premium of 1.75% added to your mortgage and a monthly mortgage insurance premium. The monthly mortgage insurance premium just dropped to .55 for those putting 3.5% down. It doesn’t go away until you pay off your mortgage. However, in many cases the FHA MI may be less than conventional rates. And the interest rate may be less.
Because of the changes to FHA mortgage insurance and some new loan level pricing adjustments on conventional loans, many homebuyers may want to look at FHA financing. Talk to your loan officer and see which program makes more sense for you.