What is the difference between an FHA (Federal Housing Administration) Loan and a Conventional Loan? Many people think of the FHA loan as the loan for “first time homebuyers”. In many cases, it is true that this may be the best option for a first time homebuyer as the down payment requirements are low and the debt to income ratios and credit score requirements are a bit more lenient. However, homebuyers should not neglect to make a comparison with the various conventional loan program options. It is often incorrectly assumed that a conventional loan requires 20 percent down. While putting down 20 percent may allow you to avoid a monthly mortgage insurance payment, there are still many options for conventional loans with down payments as low as 3% and possibly lower monthly mortgage insurance payments than the FHA loan.
First, let’s look at mortgage insurance. Private Mortgage Insurance (PMI) is required by the lender on a conventional loan for borrowers who have less than 20% equity in their homes. It is insurance to benefit the lender, not the homebuyer, in the event the borrower defaults on the loan. So if you are purchasing a home and not putting down 20% you can expect to have some type of mortgage insurance, whether it is monthly, or added into the loan either through a lump sum premium or a higher interest rate. These days there are many options for how you can pay for mortgage insurance.
FHA loans also carry their own form of mortgage insurance in what is called the UP-front Mortgage insurance premium and the Monthy Mortgage Insurance premium. The upfront mortgage insurance premium is added into the balance of the loan and the monthly insurance premium is paid monthly as part of the mortgage payment, similar to the monthly PMI option described above. Both are required in an FHA loan.
So, if they both allow low downpayments and both have a monthly mortgage insurance premium, how do you know which option is better for you?!
We will perform an analysis based on your individual circumstances to determine which results in the lower monthly payment. For a borrower with excellent credit and not a lot of debt, often the better choice is the conventional loan. For a homebuyer with a bit lower credit score or higher debt in relation to their income, then the better choice is the FHA loan. But before you make a decision, you should consider all options.
At Marimark Mortgage, we will explain your options and help you find the program that best suits your needs.