FHA vs. Conventional Loan…What Is The Difference And What Is Best For You?
FHA is a government insured loan (meaning the government actually backs the loan in the event of default). FHA only requires 3.5% down which is a huge plus especially for first time home buyers. Most banks will lend on FHA loans as long as credit is over 640 (some banks will go lower) and some level of credit is established.
Typically banks want to see 2-3 tradelines (credit card, car payment, student loan payment, etc) for 12 months. This shows them you’ve managed credit/debt. The rates tend to be as good or even better than conventional. The down side is with new rules as of 2013 the monthly PMI never goes away as long as you have the loan. PMI is calculated at a rate of 1.35%…so on a $100,000 loan the PMI is $1350 a year….or $112.50 a month. That’s a big payment to add on to your mortgage.
Conventional loans are backed by banks and typically equire 5% or more down. Conventional loans are sensitive to credit scores meaning that the lower the score the higher the rate and the fewer choices you have. As scores drop you have to put down more and more money. Most banks offer 5% down options with NO monthly PMI. While the rate may be higher than FHA, the payment will typically be much lower as there is no monthly PMI. There are no credit tradeline requirements although most banks will require that you have scores.
So whats right for you? Always consult your mortgage expert but in general if your scores are under 680 and you don’t have 5-10% to put down then FHA will be a better choice. If your scores are higher and you have 5-10% to put down then conventional works better on average. Always ask your mortgage expert to run the numbers both ways if you are on the fence so you can see which choice works best for you.
For Any Mortage Related Questions, Be Sure To Contact:
Max A Kallos
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Endorsed by Emmy Winning Consumer Advocate Dale Cardwell!