FHA or Conventional - What's the Difference?
When seeking to finance a home, you will most likely be using one of two types of programs, Conventional or FHA.
Each program has its place in the mortgage landscape, in this article we will get into the basics of each so we can help you, the mortgage consumer, along with your mortgage professional, find the one that is best for you.
FHA financing is wildly popular among first time home buyers while conventional financing is the choice for many who are refinancing and qualify for rock bottom rates.
Over the last few years High LTV Sub Prime and No money down mortgages have pretty much disappeared. That said the industry has very much reverted back to traditional mortgage programs, FHA and Conventional are at the very core of traditional financing.
Both programs are open to all, let’s see which one works for you.
FHA is a government insured mortgage program that is overseen and administered by HUD, or the Department of Housing and Urban Development. This program has become more popular lately as it has more relaxed guidelines than its conventional counterpart, but at the same time can cost a few extra dollars more each month.
When using FHA, expect to put at least 3.5% of the purchase price in as a down payment. This can come from either your own documented funds, or those documented from a close relative in the form of a gift.
Credit is much more relaxed with FHA than it is with Conventional mortgages. FHA actually sets no minimum score at which you can qualify. Some lenders have their own requirements which can be more rigid, investors are allowed to adjust the requirement based on their own appetite for risk.
While credit scores vary from lender to lender, you will be looking at around a 640 mid credit score to be able to qualify. Other factors such as reserve money, down payment and depth of credit history will sometimes allow for lower credit scores.
FHA requires mortgage insurance, two different types in fact, for a majority of borrowers.
The first is called the upfront mortgage insurance premium (UFMIP), and is a percentage (approximately 1.5%) of the total amount that you are borrowing.
It can be paid outright at closing, or can be rolled into the loan amount. FHA is not unique in requiring this upfront mortgage, USDA and VA financing also require UFMIP, conversely, conventional mortgages do not..
The second type of mortgage insurance is called monthly mortgage insurance and this will apply regardless of your down payment. FHA mortgage insurance will need to be in place for a minimum of five years, regardless of how much you are able to put down, or how much the property may increase in value during that time.
FHA mortgages have relaxed asset reserve requirements (the amount of money you need liquid after closing). The one exception to the reserve requirement would be when you are buying a multi-family home particularly a 3 or 4 family dwelling, FHA does require reserves in this case.
FHA also allows for a refinance transaction referred to as a “Streamline Refinance”. A streamline will allow you to refinance without the need for an appraisal or income documentation. The primary requirements for a streamline refinance are that you’re current on your mortgage and you are saving at least $50 per month.
FHA also has a program referred to as a 203-K. This program allows you to finance home improvements up to $35,000 as long as the improvements are adding value to the home.
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Conventional mortgages (aka conforming mortgages) which are insured by Fannie Mae and Freddie Mac are for those borrowers with higher scores and more asset reserves than those looking at FHA as an option.
Credit scores for Conventional mortgages need to be in the 680+ range. If you currently have scores in this range, a Conventional mortgage may be for you.
Asset reserves will typically be two months of your entire housing payment, meaning your mortgage payment, property taxes and property insurance. This will be addition to your closing costs if they apply.
Expect to put down between 5% and sometimes 10% when you purchase a home using a conventional mortgage. First time buyers with stellar credit profiles will be able to put down as little as 5%.
Monthly Mortgage insurance (aka MI) only applies if you are putting less than 20% down, and if you are putting 20% or more down, there will be no monthly mortgage insurance.
Many people believe that FHA mortgages are only for low income borrowers, this isn’t the case. All income ranges can and do use FHA financing for both purchase and refinance transactions.
Many believe that FHA mortgages are slow to close, this isn’t true either. FHA mortgages can close just as fast as a conventional mortgage.
You can learn about FHA Mortgages in more detail HERE
If you have questions about which mortgage program is right for you, please discuss with your mortgage professional. Poli Mortgage is an East Coast Lender based outside Boston, MA. Our in-house origination, underwriting and closing staff will make your next mortgage transaction go as smooth as possible.