Is an FHA loan better than a conventional loan?
It's not exactly the age old question, but FHA vs Conventional has become more relevant since 2008; when the housing market tumbled and lenders scrambled to replace their subprime menu.
FHA vs Conventional isn't as difficult as some lenders would have you believe. In the last few years, FHA loan costs have decreased to a point where choosing one over a conventional loan makes sense in more situations. However, FHA's decision to
charge monthly mortgage insurance for the life of the loan and its impact on your FHA loan payment can be the difference maker if you plan on living in your new home for several years.
The Case for FHA
Not all of us have 800 credit scores and piles of cash. Actually, piles of cash is what separates FHA and Conventional mortgages more than anything else. FHA loans are insured. That's why FHA buyers pay upfront mortgage insurance (financed into every FHA loan) and monthly mortgage insurance. The insurance is a safety net for lenders. Lenders will lend to borrowers with lower credit scores, smaller down payments, and smaller bank accounts because FHA will make them whole should the borrower default.
Conventional loans offer no such protection. Lenders are on the hook for the full loan amount should a conventional loan default, which is why they require private mortgage insurance (PMI) if a buyer puts less than 20% down. PMI is issued by a private company, not a government agency. Like any other insurance company, PMI companies insure loans based on risk. They want larger down payments, higher credit scores, lower debt-to-income ratios, larger asset reserves (bank accounts), and generally stronger applicants than FHA. If you don't meet even one of these criteria, FHA may be your only option.
For many borrowers FHA is the easiest way to home ownership. If you are a strong borrower and meet the more stringent requirements of conventional and PMI underwriting, a conventional loan will save you money. The important thing is to explore options with your lender.
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