You want your lifestyle and your pocketbook to get the best mortgage. It may seem somewhat ambiguous and confusing to choose between a conventional mortgage or a government-backed loan such as a Federal Housing Administration (better known as FHA)
The FHA provides down payment loans of 3.5 per cent. That sounds great especially if you don’t have much money. Yet do you know that traditional loans now provide the ability for lenders to put down just 3 percent for a mortgage? How do you decipher all of this and pick the right one?
“It’s all about who you’re talking to,” says Susan Stevenson, president of the Ohio Association of Mortgage Bankers. “It’s just about educating yourself about the various loans and having options. I could take the same options as a loan officer, and make them look different than anybody else. There are several factors in mortgages, and it also depends on what sort of house you are buying and where you are buying it.
Conventional Mortgage Low Down Payment Better than the FHA?
The FHA loans are government-backed and issued by participating lenders. There are no such governmental guarantees when you are getting a conventional loan. That means the risk is assumed by the lending bank or the loan company, if you default on the loan.
That means you don’t just give these low-down conventional loans to anyone. The guidelines for underwriting are tougher, requiring a fairly good credit score, a lower loan-to – value ratio, good income and future income, and an almost unblemished credit history.
If you plan to get one of those 3 percent down payment conventional loans offered by Fannie Mae or Freddie Mac, you need a credit score of at least 680-700, and you need to pay your bills on time, says Stevenson.
“This is a really great program. You can also get your down payment by gift money, if you are accepted, “she says. “The Guidelines were tweaked. It used to be that if you put 5 per cent down on a conventional loan, that 5 per cent would have to come from you.
Stevenson deals with all kinds of lenders who have anything from over 20 per cent to those who don’t have enough to pay for a down payment. Believe it or not, loans are open to those who have saved zero dollars. Plus, lots of down payment assistance programs are available to help people across the country buy a home.
USDA and VA loans do not require down payments, but you must be eligible for such low to moderate income loans and purchase a house for USDA loans in designated rural or suburban areas. And of course you have to be an actual or retired military person or spouse to receive a VA loan.
Typical down payment amount for conventional hypothecary
“The conventional loans are still very popular. Older people are usually down 20 percent because they are downsizing or upsizing, and selling a house. They are putting the money into a new location, “says Stevenson.
But she usually sees most people putting down between 5 and 10 per cent somewhere. Compared to the 3 percent down option, conventional loan rates decrease with at least 5 per cent down.
The dilemma for many people with no 5 percent down is whether to obtain a conventional loan over an FHA loan when they only have a little down payment.
Both credits require insurance against mortgages. Conventional loan borrowers paying less than 20 percent of their down payment will need to get Private Mortgage Insurance ( PMI). The good news is that you can cancel the premium if you hit a loan-to – value ratio of at least 78 per cent.
The bad news about FHA loans is that as long as you have the loan, the mortgage insurance remains on it. That can add some big bucks to somebody’s bill every month.
FHA vs Conventional Hypothecary Showdown
Here’s an example of how close monthly payments can be if someone wants to compare a 3.5% FHA down payment loan with a 3% down payment loan:
Stevenson says that if someone buys a $200,000 home with a 3 per cent down payment conventional loan, the interest rate could be about 4.62 per cent – higher than a 3.5 per cent FHA loan. And remember, all this really hinges on your credit score – you get a lower interest rate if it’s in the 700s.
Fannie Mae charges points – AKA extra charges – to make their loans of 97 per cent. Borrowers typically pay those fees by accepting a higher rate instead of paying out of pocket. So the rate ends up a bit higher than the FHA alternative.
The annual PMI would be $151 a month for the traditional loan.
With an FHA loan on the same $200,000 home, PMI would be much lower than the traditional loan ($137 a month). You would be paying $1,148.43 for the conventional loan every month before taxes. At $1,018.82 the FHA would be slightly less. FHA’s upfront mortgage insurance is rolled back into the loan, and it reduces the monthly mortgage payment, she says.
Remember, though, that once you hit that 78 percent loan-to – value point (i.e., have 22 percent equity), $151 a month PMI goes off on conventional lending.
Seen side-by – side, this is what every loan would look like, before taxes, home insurance and HOA dues:
- Conventional down 3 percent: $1,148 per month
- FHA: $1,018 mensually
After an equity of 22 per cent
- Conventional down 3 percent: $997 per month
- FHA: $991 a month (decrease in FHA mortgage premiums dependent on present principal owed)
“Each single situation would be different. But those with lower credit scores will likely move for an FHA loan, “says Stevenson. “If you’ve got a credit score of 750 and you’re down 3 to 5 per cent, you ‘d most likely go with a conventional loan.”
And you can put down as much as you can afford with a traditional loan which will help to lower your monthly payments. But remember not to leave yourself to emergencies like a busted water heater or broken window without any money. Stuff is happening, so you need a fund set aside for these repairs so purchases.
FHA and Conventional rate 97 Available quotes
It is hard to tell if the best option for you is an FHA or conventional loan just by reading an article. Today, you can get live quotes from actual borrowers.