Which is Best for You? FHA vs Conventional Mortgage
Bills Bottom Line
If you have a Credit Score over 640, then you should consider a conventional loan over a FHA loan. With the increase in FHA mortgage insurance premiums, a conventional loan is now a more attractive option. Conventional loans are also available for mortgages with a down-payment of only 3-5%. Make sure that you shop around and compare the mortgage rates and fees over the time you expect to hold on to the loan.
Qualifying for a FHA vs Conventional Loans
If you have steady income, a low debt load, and a good-excellent credit score, then a conventional loan is a great option. This is true even if you have a small down payment, even as low as 3%. In order to qualify for a conventional mortgage loan vs a FHA loan your lender will look at your:
- Credit Score – A conventional loan requires a higher credit score, most likely over 680. If your credit score is over 620 you will need to consider a FHA loan.
- Down Payment – You can get a conventional loan with a down payment as low as 3% (but you will need a good credit score). A FHA loan is available for a down payment as low as 3.5%.
- Income and Debt - A conventional loan allows for a debt to income ratio (DTI) as high as 45%, although lenders prefer a DTI around 36%. FHA loans require a total DTI of 43%, as well as a housing relating DTI of 31%.
Mortgage Insurance for a FHA vs Conventional Mortgage
All FHA loans require mortgage insurance, whereas a conventional loan requires mortgage insurance only if you make a down-payment less than 20%. Whenever you compare your options remember to compare both interest rates and mortgage fees. When comparing your mortgage insurance options look at both premiums and cancelation rules.
Cancelation: In general your mortgage insurance on a conventional loan will automatically expire when your Loan to Value ratio (based on your original payment schedule and the original value of your home) reaches 78%. Due to new FHA mortgage insurance rules in 2013 your FHA loan's Mortgage Insurance will not expire for the entire life of the loan.
Premium: Calculating the actual mortgage insurance premium for a conventional loan is a bit tricky as it depends on a large number of factors; however, you CAN save a lot of money if you have a good-excellent credit score and/or a larger down payment. A FHA loan for under $625,000 would have monthly premiums of 1.35% for loans with a loan to value ration (LTV) over 95% and 1.3% if the LTV is under 95%. Mortgage premiums for a 30-year conventional loan, based on the Genworth tables for August 1, 2013 would be:
If your credit score is 680, then you can save money with a conventional loan. For example, if you take out a 30-year mortgage for $250,000, your credit score is between 680-719 and you put down a 5% down payment your beginning mortgage insurance payment will be $196 for a conventional loan vs. $271 for a FHA loan
Choosing between a FHA or Conventional loan – Monthly Payments
Your monthly payments include principal, interest and if necessary mortgage insurance. In most cases you will also need to pay property insurance and property tax into an escrow account. The chart below shows two cases (for illustrative purposes only) of your monthly payment for a conventional loan vs FHA loan.
Conventional vs FHA loan - $270,000, 90% Financing on a $300,000 property, 30 Year Loan, Good Credit Score
|Interest Rate||4.00% / APR 5.308%||4.5% / APR 5.0%|
|Principal & Interest Payment||$1,289||$1,368|
|Mortgage Insurance Payment||$298||$140|
|Mortgage Insurance Premium||1.3%||0.59%|
|Upfront Mortgage Insurance Payment||$4,725||none|
|Lender Fees and Costs||Points: $788||Points: $2,363|
When comparing the offers keep these points in mind:
- The APR is based on keeping the loan for the entire 30-years. If you pay off the loan earlier, then your APR will change considerably.
- While the FHA loan has lower mortgage payments, your combined mortgage and mortgage-insurance payment will be cheaper for the conventional loan: $1508 for the conventional mortgage vs $1587 for the FHA loan.
- The conventional loan’s mortgage insurance will be canceled after 7, whereas the FHA loan requires payments for the entire length of the loan.
- The FHA loan comes with a hefty upfront fee (UFMIP) of 1.75% of the loan.
- Compare all the lender’s fees and costs when choosing between different mortgages.
It isn't always easy to choose between a FHA vs conventional loan. However, the higher the credit score, the lower your costs on mortgage insurance for a conventional loan. Here are some steps to help you: