Conventional vs. FHA Financing – The Cheaper Option

Among all homebuyers who take out mortgages to finance their purchases only 20 percent prefer FHA loans over the conventional mortgages. However, the choice that you make depends on what kind of down payment you are ready to make and your credit score.

Those borrowers who are fine with making a 20 percent down payment might find it easier to get a conventional mortgage. This way they can do away with the mortgage insurance which can end up increasing their monthly payments. If you can’t afford the 20 percent down payment, have a higher debt-to-income ratio than required, or a low credit score, it is better to explore the other programs and get in touch with a few FHA-approved lenders through FHA leads.

When compared to conventional mortgages, FHA loans are definitely cheaper since they have lower interest rates and cheaper mortgage insurance. However, in case of a conventional mortgage, you can get your private mortgage insurance canceled without resorting to refinancing. In case of FHA loan, refinancing to a non-FHA mortgage is the only way to get rid of the insurance.

The PMI rates in case of a conventional mortgage can vary depending upon the size of your down-payment and your credit score. However, the PMI will end automatically once your loan-to-value reaches 78 percent.

In case of an FHA loan, you will have to pay two types of mortgage insurance. One is the upfront mortgage insurance that you pay at the time of closing. This is typically 1.75 percent of your loan amount and can be wrapped into your loan balance. The other type of mortgage insurance is the annual mortgage insurance that you have to pay along with your monthly mortgage payments. This comes up to 0.85 percent of your loan amount if the amount is within the loan limit of $679,650. If it is above this limit, you might have to pay annual mortgage insurance of 1.05 percent.

The 3.5 percent down payment is the factor that makes FHA loans appealing to most borrowers. Also, the credit qualifications are less-stringent in case of FHA loans since they come with a guarantee by the Federal Housing Administration.

The upfront costs associated with an FHA loan are much cheaper when compared to those of conventional mortgages. Moreover, 6 percent of the closing costs will be paid by the seller in case of FHA loans. While in the case of conventional mortgages, this is only 3 percent if the down payment that you are making is 10 percent or less.

You can get an FHA loan with a credit score as low as 580. However, you will need a credit score of at least 660 to qualify for a conventional mortgage. Also, your debt-to-income ratio would be capped at 45 percent if you are going for a conventional loan. This can be as high as 55 percent for an FHA loan.

FHA loans have become more affordable when compared to what they were five years ago, because of the cut down in mortgage insurance premium. Nevertheless, before you make any decision it is always better to explore your options and compare the terms of a few lenders, especially if you cannot afford a down payment of more than 10 percent.

You don’t have to make a 20 percent down payment to get a conventional mortgage. Today many lenders, who contact borrowers through FHA leads, are ready to offer conventional mortgages for down payments as low as 5 percent. However, you will have to pay higher interest rates and mortgage insurance premium that might, in the long run, make your monthly payments unaffordable. To avoid such situations, it is better to do your homework and see which option works out better for you, before signing the deal.

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