FHA Loan vs Conventional Loan Which Mortgage is right for you when buying a home in Phoenix AZ?
There’s no one-size-fits all when it comes to real estate mortgages. It depends on your situation and comfort level when paying for mortgage. For some borrowers a Federal Housing Administration-insured aka FHA loan will win hands down; for others a conventional loan will trump all others in the race. That said, there are material differences between conventional and FHA-backed loans — and it doesn’t just come down to money.
What is a FHA Loan?
An FHA loan is a mortgage insured by the Federal Housing Administration, which is managed by the Department of Housing and Urban Development (HUD). The FHA guarantees the loan and to pay the lender’s losses if the borrower defaults or the bank has to foreclose. The guarantee greatly reduces the lender’s risk. As a result, the lender can offer mortgages to borrowers who may not qualify for a conventional loan, such as those with a lower credit score or a low down payment. The FHA famously insures mortgages with a little as 3.5 percent down.
Also Read: Buying a House with FHA Loan in Phoenix AZ
FHA Loan Advantages
- Low down payment required (3.5 percent minimum)
- Can go as low as 500 credit score
- Not limited to 43 percent for debt-to-income ratio
- FHA loans are assumable
- FHA loans are eligible for “streamline” refinances
- Shorter timeframe following major credit problems (3 years vs. 7 years for foreclosure and 2 years vs. 4 years for bankruptcy)
- FHA loans typically will have a lower base interest rate than a comparable conventional loan
FHA Loan Disadvantages
- Each FHA loan has 2 mortgage insurance premiums. Mortgage insurance is required on all FHA loans regardless of the loan-to-value
- An upfront premium of 1.75% of the loan amount, paid at closing
- An annual premium that varies from a low of 0.45% to a high of 0.85%. This premium is rolled into the monthly mortgage payment
- FHA mortgage insurance will stay for the entire life of the loan
What is a Conventional Loan?
A conventional home loan is one that is not insured or guaranteed by the federal government in any way. Conventional loans fall into one of types categories: conforming and non-conforming. A conforming loan is one that meets the underwriting guidelines of Fannie Mae or Freddie Mac. Fannie and Freddie are the two government-controlled corporations that purchase and sell mortgage-backed securities (MBS). Simply put, they buy loans from the lenders who generate them, and then sell them to investors via Wall Street.
A non-conforming loan does not meet Fannie and Freddie standards. Usually, these loans are jumbo mortgages that fall above the lending thresholds set by Fannie and Freddie, or are loans made to borrowers with non-conforming credit histories or debt loads. Non-conforming loans are riskier than conforming loans and carry a much higher interest rate.
Conventional Loan Advantages
- Higher down payment required, although there are program available for down payment as low as 3%
- Mortgage insurance is required for loans exceeding 80 percent loan-to-value
- Private mortgage insurance is only monthly or single premium
- Private mortgage insurance will automatically cancelled at 78 percent loan-to-value (depending on lender)
- Even though conventional loans may have higher interest rates, the monthly payments may still be lower
Conventional Loan Disadvantages
- You’ll need excellent credit to qualify for the best interest rates
- Qualified mortgage rule applies for conventional loans, 43 percent for debt-to-income ratio
So Which is the Better Loan?
FHA is often best when looking to minimize out of pocket cash & down payment. Conventional loans are for borrowers with strong credit & more liquid assets.
The advice, as always is to shop around. Before you make any decision, talk to a mortgage company about both options – FHA and conventional loans. Your broker or loan officer can give you a detailed comparison of both types of loan, including upfront fees, mortgage insurance and monthly payment estimates, so you can compare the cost.
Swee Ng, Realtor and Phoenix East Valley resident specializing in win-win real estate transaction through great communication and fighting for his clients’ best interest. After all, this is more than real estates, this is about your life and your dreams.
If you are looking to buy or sell your home in Phoenix AZ area, we hope you will consider us. Contact us today for complimentary consultation.
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