FHA vs. CONVENTIONAL – WHICH IS BETTER CHOICE
Mortgage Banker
Richard Blair
Published on February 21, 2021

FHA vs. CONVENTIONAL – WHICH IS BETTER CHOICE

Want to avoid a simple mistake that could cost you thousands of Dollars by asking just one question?

Verify my mortgage eligibility (May 20th, 2022)

Two popular loan options for home buyers are FHA, a government program,  and conventional loans.

FHA is designed to get as many first-time buyers’ as possible into a home with a loan down payment. Here are four reasons why FHA helps certain home buyers get approved for a mortgage:

  1. It is more lenient on borrowers with a lower credit score or a shorter credit history.
  2. Requires only 4 years after a foreclosure vs. 7 years for conventional.
  3. Requires only 2 years after a bankruptcy vs. 4 years for conventional.
  4. Allows for higher debt-to-income ratios than conventional.

If the lender only pre-qualified you for an FHA loan then ask this simple question: “Why is an FHA loan the best option for my situation and do I qualify for a conventional loan?”

Verify my mortgage eligibility (May 20th, 2022)

Let’s examine some differences between FHA and Conventional loans to understand why you should consider both options.

Down Payment: Although FHA is a great low down payment program requiring only 3.5% of the purchase price it does come with a price. The FHA loan requires an upfront fee of 1.75% of the purchase price which is added to your home loan. For example, on a $250,000 loan the upfront fee added to your mortgage is $4,375.00. This takes away from your home equity. Your mortgage payment will increase because you are paying interest on a higher loan amount for as long as you have the loan.

A standard conventional loan program requires a 5% down payment, but there is no additional upfront fee.  You pay an extra 1.5% for down payment on conventional, but it is less expensive than adding the 1.75% upfront fee to the loan balance.

Verify my mortgage eligibility (May 20th, 2022)

Conventional  offers a 3% down payment, with no upfront fee, and a reduced rate for mortgage insurance. The down payment is actually less than FHA, but there is an income cap for qualifying on this program.

Mortgage Insurance: FHA has a competitive mortgage insurance rate that is same for everyone putting down the minimum down payment, regardless of credit score. Conventional has different tiers for mortgage insurance depending on your credit score. If your credit score is over 720, in many cases the mortgage insurance on the Conventional 3% down  payment program will be less than FHA.

With a 3.5% down payment FHA monthly mortgage insurance never gets dropped, so you must pay mortgage insurance as long as you have the loan. Conventional loans provide for mortgage insurance to be removed from your mortgage payment automatically at a certain point described by law. Or you can request the lender to remove the mortgage insurance if your home value has increased and you have 20% equity in your home.

Verify my mortgage eligibility (May 20th, 2022)

Interest Rate: It is true that FHA mortgage rates are typically lower than conventional, this varies by lender too. If the only reason your Lender suggests FHA is because of a lower interest rate, or lower payment, then ask to see a side-by-side comparison of  FHA vs. Conventional. Depending upon how long you will live in your home, and other factors, the lower rate alone may not be the wisest financial decision.

The bottom line is get educated, ask the right questions, review options and empower yourself to make wise decision.

Show me today's rate (May 20th, 2022)
Mortgage Banker
Richard Blair Mortgage Banker
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(480) 542-1085