Conventional vs FHA

by alecoesterreich  - August 12, 2023

The two most popular residential mortgage programs are FHA and Conventional. So how do you determine which one is right for you? There are a few things that you need to consider.

Down Payment
FHA mortgages have a minimum Down payment of 3.5%. While a Conventional mortgage starts with a minimum of 5%. The difference is only 1.5% so in alot of cases this is not the deciding factor in which program people end up going with but it is something to take note of and consider along with the other factors.


Credit Score
FHA mortgages are pretty friendly when it come to credit scores, you can obtain a mortgage with 3.5% down payment as long as your score is above 580 and 10% down payment if your score is lower than that. Although having a higher credit score is always recommended, FHA loans are a good option for those struggling with their credit but need to buy a property now. Meanwhile conventional loans require a minimum credit score of 640 to obtain a mortgage.

Interest Rate
FHA is always lower than Conventional by anywhere from .25-.5% it varies depending on Credit. However the tricky part is that although the interest rate is lower with FHA it does not mean that the monthly payment is lower.

That's because of something called...

Mortgage Insurance
Mortgage insurance is a monthly fee that you pay in addition to your regular mortgage payment, this fee acts as an insurance policy for the lender in case of default or somebody is unable to make their mortgage payment it protects the lender financially. FHA always has mortgage insurance at a rate of anywhere from .85 -1.05%.

However, conventional loans only have mortgage mortgage insurance when you have less than 20% equity in your home. If you have a down payment of 20% you don't have to pay it at all or if you put less than that, after you have paid for your mortgage for a few years it will automatically be removed from your monthly payment. Mortgage insurance for conventional loans is much lower usually .15 - .4% which is why Conventional loans have a lower monthly payment in most cases.

FHA loans always have mortgage insurance, Conventional only has mortgage insurance with less than 20% equity.

So which loan type is best? It ultimately depends on your individual situation. Consult with a Mortgage specialist to for more information.

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