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Conventional Or FHA Financing Which One

It’s important to consider and understand the entire package when comparing a conventional or FHA financing.

“A conventional mortgage refers to a loan that is not insured or guaranteed by the federal government. A conventional, or conforming, mortgage adheres to the guidelines set by Fannie Mae and Freddie Mac. It may have either a fixed or adjustable rate”

“FHA loans have been helping people become homeowners since 1934. How do we do it? The Federal Housing Administration (FHA) – which is part of HUD – insures the loan, so your lender can offer you a better deal.”

At first glance, it’s easy to think that the FHA’s lower down payment requirement and lower interest rates make it the best option.  And yes, the minimum down payment requirement for a conventional loan is slightly higher (5% down vs. 3.5% down FHA), and, yes, interest rates on FHA loans are generally significantly lower than interest rates on conventional loans.

So FHA loans have a lower down payment and a lower rate?  Why consider conventional?  Read on.

Conventional or FHA Financing

Why conventional?  Mortgage insurance premiums.

The chart below illustrates a scenario where a borrower with a 720 credit score is making a $200,000 purchase.  Despite the conventional loans higher interest rate, the conventional loan is the better option because the mortgage insurance is so much more affordable.

There are several factors that determine the best mortgage option for your unique situation.  Make sure to consider and understand your option before making your final decision!

As always, contact us for information on any type of financing as we can make your buying process easy.

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