FHA vs Conventional Mortgage

Clients always ask whether they should do an FHA Mortgage or a Conventional Mortgage? What I feel they really want to know is which type of mortgage, a FHA Mortgage or a Conventional Mortgage is best for their unique mortgage needs. And that’s really what it depends on the unique situation of the borrower when they are applying for a mortgage. It is foolish for anyone to argue that a FHA Mortgage is always better than a Conventional Mortgage or vice-versa.  It depends on the borrowers unique set of circumstances and situation at the time.

There are several differences between a FHA Mortgage and a Conventional Mortgage. Here are the important ones generally speaking:

1. A FHA Mortgage on a purchase requires only a 3.500% Down-Payment and a Conventional Mortgage requires a 5.000% Down-Payment

2. Using the above Down-Payments a FHA Mortgage requires only a 620 FICO score where as a Conventional Mortgage requires a 660 FICO score due to underlying Mortgage Insurance requirements.

3. With a FHA Mortgage part or all of your down-payment can come in the form of a gift from family members. On the other hand, a Conventional Mortgage requires the borrower to have 5% of their own funds in the transaction.

4. A FHA Mortgage has less-stringent reserve requirements than a Conventional Mortgage.

5. The most important difference is the types and cost of mortgage insurance required with either a FHA Mortgage or a Conventional Mortgage. A FHA Mortgage has both an up-front mortgage0insurance premium that can be rolled into the loan amount in addition to a monthly mortgage-insurance premium that is due with each mortgage payment.

While a Conventional Mortgage has a montly mortgage premium due with each mortgage payment there is no up-front mortgage-insurance premium.  The cost of the upfront mortgage-insurance premium for a FHA Mortgage is 1.000% of the loan amount. The monthly mortgage-insurance premium for a FHA Mortgage is 1.100% versus .062% for a Conventional Mortgage.

Now that we have the differences here are some general rules of when you would obtain a FHA Mortgage:

A. The Borrower only has 3.500% for a down-payment

B. The borrower has nothing for a down-payment and needs it to be gifted from a family member

C. The borrower has credit scores that will not qualify them for a Conventional Mortgage

All other things being equal if “A, “B”, or “C” above does not apply to you it is better to obtain a Conventional Mortgage for one simple reason – LOWER COST. One a Conventional Mortgage has no up-front mortgage insurance premium and the monthly mortgage insurance premium is almsot half the cost of the FHA Mortgage insurance premium.

On a $100,000 mortgage amount the savings if you can go with a Conventional Mortgage is $1,000 on just the up-front mortgage insurance premim costs that you don’t have.

As a consumer always ask the person doing your mortgage why they are recommending one type of mortgage over another. They may be putting you in a program with unnecessary higher-costs. They should be able to clearly explain why they recommend a loan program and it should make sense. Hopefully the above tips will help you with their assessment.

This entry was posted in Mortgages and tagged , , , . Bookmark the permalink.

Leave a Reply