FHA or Conventional Financing? Which One is Right for You?

My contibuter for this post is Jim Hensley with First Savings Mortgage. I called him and asked if he could help me out on this one as buyer's are confused about different loan options all the time. I know only the tip of the iceberg so thought it best to go straight to the source. Thanks Jim!

First I have to say that in doing some research to write this I was amazed amount the amount of dated and incorrect information that I found online. In fact it was downright contradictory. As a layman I would have found this very confusing and obviously not very helpful.

I hope that this will help you or a friend in assessing what options currently are available on buying a home in the DC marketplace with little down. Recent shifts in the market have caused some changes that do affect the value of each of the options and I hope to clarify some of the misinformation that is currently out there.

When I speak of low down payments we are talking about 5 percent or less down. Many folks don’t understand that there are options out there for putting as little as 3 percent down even in this tight mortgage market. Let’s take a look at each.

FHA stands for the Federal Housing Administration which falls under the Department of Housing and Urban Development (HUD). FHA was created to insure mortgage loans with low down payments. FHA will currently insure mortgages up to $729,750 in high-cost areas, which includes most of the regional marketplace including Northern Virginia, metro Maryland and of course the District of Columbia. FHA will allow for as little as 3.5 percent down on these mortgages but effective with all case number assignments (new loans) starting April 9th the mortgage insurance costs have increased yet again.

FHA mortgage insurance is paid in two parts, an up front mortgage insurance premium which is often financed and a monthly mortgage insurance premium paid each month as part of the monthly mortgage payment. The upfront mortgage insurance premium for a low down payment (3.5 percent) loan is now 1.75 percent or $1,750 on a $100,000 mortgage. The monthly mortgage premium is 1.25 percent or $104.17 monthly on a $100,000 loan.

Conventional financing also requires mortgage insurance for any loan with a down payment of less than 20 percent. The difference is that there is no required up front mortgage insurance premium and the monthly mortgage insurance rates are less than an FHA loan in most cases. There are also a number of options for one time payment of the mortgage insurance premium rather than monthly payments which can be very attractive.

Conventional financing can be structured with as little as a 3 percent down payment but only on loans up to $417,000. Over $417,000 and up to $625,500 the down payment requirement increases to 10 percent down. For comparison purposes the monthly mortgage insurance payments, assuming an excellent credit score and a 3 percent down payment, would be $67.50 per month for a $100,000 loan or .81 percent annually. Again, remember that there is no up front mortgage insurance premium

Let’s look at some of the other areas of comparison since we now know that we can get a conventional loan with about the same amount of a down payment up to a loan amount of $417,000 and the mortgage insurance costs are much less. Why choose and FHA loan?

Co-borrowers/co-signors. FHA will allow for a non-occupant co-borrower to be added to the mortgage and the use of that borrower(s) income for qualification purposes. Only the occupant borrowers income can be considered on a conventional loan until a 10 percent down payment level is reached and then the non-occupant co-borrowers income can be considered

Credit:Generally FHA is less restrictive on credit issues and a lack of traditional credit.

Rates: Generally the same with a slight edge on any given day to an FHA loan. FHA has a great 5-year fixed/adjustable rate mortgage with 1 percent caps on the increase after the initial 5-year fixed term. Great for first time homebuyers!

In summary, there are instances where an FHA loan is the only low down payment option that will work and this is fine however as we have seen there are other less expensive low down payment options out there which should be considered. Let your experienced loan officer help make the right choice for you!

Ellen Moyer
RE/MAX Allegiance
www.ellenmoyer.com

Jim Hensley
First Savings Mortgage
www.thehensleymortgageteam.com