I’m often asked about the different types of loans available for those with a limited down payment. The main options are Fannie Mae and Freddie Mac conventional mortgages or FHA loans. But which one is best?
Let’s take a look at all 3 issues:
1. Credit score – buyers with low-to-average credit scores may be better off with an FHA loan. FHA mortgage rates are generally slightly lower than conventional ones for applicants with lower credit, and FHA loans allow credit scores down to 580.
2. Down payment – borrowers can come in with a lower down payment with conventional products, at just 3% down. FHA requires 3.5% percent down.
3. Long-term goals – conventional mortgage insurance can be cancelled when the home achieves 20% equity. FHA mortgage insurance is payable for the life of the loan and can only be canceled with a refinance. Buyers who plan to stay in the home five to ten years may opt for conventional, as the FHA mortgage insurance can add up over time.
For a more, I’d invite you to visit the source at The Mortgage Reports and Dan Green’s post.
FHA Or Conventional – Which is Superior?
There are a multitude of low-down payment options for today’s home buyers but most will choose between the FHA 3.5% down payment program and conventional options such as HomeReady, Home Possible, and Conventional 97.
For example, in deciding between an FHA loan and a conventional option, the borrower’s individual credit score matters greatly. This is because the credit score determines whether the borrower is program-eligible; and, it affects the monthly mortgage payment, too.
FHA loans are available with credit scores of 580 or better. The conventional options, by contrast, require a minimum credit score of 620.
Therefore, if your credit score is between 580 and 620, the FHA loan is essentially the only available option.
As your credit score increases, though, the conventional options become more attractive. Your mortgage rate drops due to the lower score and your mortgage insurance costs do, too. This is different from how FHA loans work.
With an FHA loan, your mortgage rate and MIP cost the same no matter what your FICO score.
Therefore, over the long-term, borrowers with above-average credit score will typically find conventional loans more economical relative to FHA ones.
In the short-term, though, FHA loans generally win out.
A Second Thought
One main consideration has to be the length of time you would expect to “keep” this mortgage.
Borrowers should take into consideration that FHA MIP is forever but conventional mortgage insurance goes away at 80% loan-to-value. This means that, over time, your conventional option can become a better value — especially for borrowers with high credit scores.
It’s hard to know for how long you’ll hold a loan, though. Sometimes, we expect to live in a home for the rest of our lives and then our circumstances change. Or, sometimes mortgage rates drop and we’ve given the opportunity to refinance.
As a general rule, though, in rising-value housing market, if you plan to stay in the same home with the same mortgage for longer than six years, the conventional 97 may be your better long-term fit.
One other thing to consider is upfront charges.
The FHA charges a separate mortgage insurance premium at the time of closing known as Upfront MIP. Upfront MIP costs 1.75% of your loan size, is generally added to your balance, and is non-recoverable except via the FHA Streamline Refinance.
Upfront MIP is a cost. The conventional versions do not charge a fee.
FHA vs Conventional Infographic
You can find out much, much more about low-down payment options, as well as the specifics of these loans here.
For today’s low down payment home buyers, there are scenarios in which the FHA loan is what’s best for financing and there are others in which the conventional option is the clear winner. Rates for both products should be reviewed and evaluated.
It would be my pleasure to help you find the version that’s most optimal for your situation, so please do contact me for more details!