For Home Buyers In Gwinnett County and Metro Atlanta- What’s Better An FHA or Conventional Mortgage Loan?

Home buyers and refinancing owners alike frequently ask the question “What’s Better An FHA or Conventional Mortgage Loan?”.

Well it’s not so much that one is better than the other, but rather what’s the best option for your circumstances. Sometimes FHA is right or only option for a home buyer, and at other times conventional mortgage financing may be the way to go. Usually it comes down to the home buyers credit score and down payment.
Before going any further let’s look at a brief overview of each program.

FHA Loan Facts:

• FHA is a mortgage loan insured by the US Federal Housing Administration. FHA loans are provided by FHA-approved lenders.
• FHA loan allows a home buyer to purchase with 3.5 % down payment. FHA mortgages or generally 15 or 30 year mortgages.
• Your down payment does not need to come from your personal savings. Other allowed down payment sources are: a gift from a family member and/or a grant from state or local government down payment assistance programs.
• Home sellers, builders, and lenders are allowed to pay up to 6% of your closing cost. If the lender pays your closing cost, they will charge you a slightly higher interest rate.
• FHA mortgage interest rates typically beat the market average by as much as a quarter percent.
• This loan is for primary residences (no investor loans).
• With FHA loans, you pay for mortgage insurance premium known as MIP. This insurance does not benefit you as the consumer, rather it protects the lender from loss should you default on the loan.
• FHA now requires MIP (mortgage insurance premium) to remain for the life of the loan.
• FHA loans require a 2-part mortgage insurance premium. The first part is the upfront premium, it is paid once at loan inception. The current upfront premium is 1.75% of the loan amount. The upfront premium is typically financed into the loan. The second part is the annual premium and it is paid monthly by being added to your mortgage payment.
• FHA has a higher bar on property conditions which can make the home purchase more challenging. FHA has rules on how long the seller needs to have owned the home (conventional does not).
• FHA currently insures 1 in 4 new U.S. mortgages, making it one of the largest mortgage insurers in the world.

Conventional Loan Facts:

• A conforming conventional loan is a mortgage with terms and conditions that meet the funding criteria of Fannie Mae and Freddie Mac.
• Fannie Mae and Freddie Mac were created by Congress. They perform an important role in the nation’s housing finance system – to provide liquidity, stability and affordability to the mortgage market. they guarantee the purchase of loans that meet conforming guidelines from banks, savings and loan, credit unions and other mortgage lenders. They either hold these mortgages in their portfolios or package the loans into mortgage-backed securities (MBS) that may be sold. Lenders use the cash raised by selling mortgages to engage in further lending.
• However, Fannie Mae and Freddie Mac have both recently reintroduced and retooled their 3% down payment mortgage loan options the Conventional 97(Freddie Mac) and the HomeReady (Fannie Mac). Other conventional loans require a minimum of 5% down payment.
• Conventional 97 does not need to come from your personal savings. Other allowed down payment sources are: a gift from a family member and/or a grant from state or local government down payment assistance programs.
• Conventional programs require PMI (Private Mortgage Insurance) to remain for until you have acquired 20% equity in the property. This insurance does not benefit you as the consumer, rather it protects the lender from loss should you default on the loan.
• PMI is paid monthly by being added to your mortgage payment, there is no up front premium.
• These loans are for primary residences (no investor loans).
• Conventional 97 are 30 year mortgages. HomeReady™ mortgage program have access to a 10-year fixed-rate mortgage; the 15-year fixed-rate mortgage; the 20-year fixed-rate mortgage; and, the 30-year fixed-rate mortgage.

Credit Scores Matter

Generally, speaking borrowers with average credit scores or lower will be better suited to an FHA loan. The credit score requirements for an FHA loan are not as stringent as for conventional loans. The credit score determines whether the home buyer is program eligible. The credit score also affects your monthly payment.

FHA loans are available with credit scores of 580 or better. By contrast the Conventional 97 and HomeReady will require a minimum credit score of 620.
Therefore, if your credit score is between 580-620 then FHA is the ONLY option for you.
When determining payments- FHA works differently than Conventional 97 and HomeReady.
In general, the lower your credit score the higher your interest rate and thus your payment and vice versa a higher credit score will net you a lower rate and payment.
The other factor affecting your payment that comes into play here is the amount of MIP (Mortgage Insurance Premium) or PMI (Private Mortgage Insurance). To recap – with an FHA loan your MIP cost is the same no matter your credit score. However, with Conventional mortgage programs a higher credit score means lower PMI cost. FHA now requires MIP to remain for the life of the loan while conventional loans remove the PMI once you’ve acquired 20% equity in the property.

Soooo which is better – FHA or Conventional?

There is no clear winner here. There are scenarios in which FHA is best and scenarios where a conventional program is the clear winner. Your lender should assist you with the evaluation of both programs to choose which will work best for you.

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Find out if you qualify for Down Payment Assistance Now:

Blisss Life Realty will be hosting the “Stop Renting-Start Buying Home Buyer Series- Get Credit Ready to Buy Your Home and Down Payment Assistance” beginning Saturday, February 4 at 11:00 am. For more information or to register click here.

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