FHA vs. Conventional Loan

When comparing an FHA vs Conventional Loan, which is better? That seems like a simple enough comparison, but it really doesn’t have a simple answer. Each program has different features, so there are benefits and drawbacks to both when comparing them side by side.

Additionally, everyone’s situation is different, so the answer of what’s best FOR YOU requires a better understanding of each program, and its differences. Fortunately, you’re in the right place! I’ve been a Full-Time Mortgage Professional since 1987, so I can cover those areas thoroughly, but efficiently.

If you don’t want to learn such a big part of the mortgage business but just want to know which is right for you, you can simply complete a prequalification form, Basic Qualification FHA or Basic Qualification Conv or Contact Us. From there, we will go through the different steps to figure which program best serves your needs.

There are several key differences between these two loan programs, which will impact the interest rate, loan balance, mortgage insurance amount, etc. Let’s starts with the main consideration when deciding between an FHA vs. Conventional Loan:

Credit - A credit report is more than just the credit score. The quality and complexion of your credit may present challenges, that are not score related, which can determine the type of mortgage that best meets your needs. When it comes to your credit score, it will impact the available rates for a Conventional loan much more than an FHA loan, so a lower score may make an FHA loan the best choice. The rules for each program differ and the credit qualifications are among those differences.

Debt to Income Ratio (DTI) - This figure represents the amount of monthly debt, as a percentage of overall income. For instance, someone who makes $5000 per month and has monthly debt of $2000, has a DTI of 40%. A higher DTI is allowed for an FHA vs. Conventional Loan, so this may determine which mortgage type is better for you.

Monthly Mortgage Insurance (MMI) - The mortgage insurance paid each month for a loan will vary with an FHA vs. Conventional loan, based on the credit score. The lower the score, the higher the MI for a Conventional loan.

FHA has fixed Mortgage Insurance rates, regardless of credit scores, which will benefit those with lower credit scores. This is a win for FHA.

Up-Front Mortgage Insurance Premium (UFMIP) - Conventional Loans do not have this insurance. This is only for FHA Loans and is charged at the origination of the loan. The amount of this Insurance is currently 1.75% of the Base Loan Amount. Base Loan Amount is the Sales Price, minus the Down Payment. The UFMIP is usually financed into the loan, meaning it is added to the Base Loan Amount. If the loan is paid off within the first several years, a prorated amount will be refunded. Because of this insurance cost, Conventional wins in this department when comparing an FHA vs. Conventional Loan.

Maximum Loan Amount - FHA Loans have different loan limits than Conventional Loans. Meaning, the maximum amount you can borrow for your home may become a deciding factor for which loan program is best for you.

Interest Rate - The interest rate for a Conventional Loan is generally higher than the interest rate for an FHA Loan. However, since the interest rate only impacts the P&I (Principal and Interest) part of the total monthly payment, people with higher credit scores often have a lower monthly payment with a Conventional Loan, because of lower MI and no UFMIP. Conventional Loans also have a lower mortgage balance, since there is no UFMIP. Higher credit scores will make this is a win for conventional when comparing an FHA vs. Conventional Loan.

Down Payment - If you have a Down Payment in the 10%+ range, the available interest rates and MI for a Conventional Loan can be lowered and make a Conventional Loan the way to go.

In Conclusion - As you can see, there is no simple answer to the FHA vs Conventional Loan question. However, with just a few minutes, you now understand how to make such a decision for yourself.

If any questions remain, please feel free to Contact Us with your specific details and we will be more than happy to help you make such an important choice with the best information and experience available.

If you have any questions, or want further clarification, please feel free to call us at 702-461-4663 or Email - Team@SmartestLoan.com to let us know how we can best help you.

If you would like to get the different rates and pricing scenarios:

Click here for FHA  Smartest Loan.com

Click here for Conventional  Smartest Loan.com