Many folks are confused when it comes to loan options. What type of loan, FHA Loan, VA Loan, or maybe a Conforming Conventional loan? What about fixed rates versus adjustable loans?
1. FHA charges a 1.75% upfront fee known as MIP (Mortgage Insurance Premium) (which is added to your loan balance)
2. FHA charges Monthly Mortgage Insurance of 1.35% annual (divided by 12 monthly payments) on a 30-yr loan with less than 10% down. To calculate it, take your loan amount times 1.35%, then divide by 12. This number is what is added to your loan payment
3. FHA Mortgage insurance can never be removed from the loan if you put down less than 10%. This is change from the old rules as of 2013
4. FHA technically allows a credit score down to 580 with just 3.5% down, but most lender will require at least a 620 or higher score
5. With FHA, there is no real difference in the interest rate from borrowers with a low 640 score to borrowers with a 800 score.
6. While rates can change, currently FHA rates are usually a little lower than conforming mortgage rates.
Consider Conforming Conventional:
1. No upfront Mortgage Insurance Premium charge
2. Monthly PMI is lower than FHA PMI. The cost does vary by credit score and down payment. The more down payment, the cheaper the PMI.
3. PMI can be avoided when the borrower puts 20% or more as down payment
4. Conventional PMI can be asked to be removed at 80% loan-to-value. This can be a combination of paying down the loan, or increased value. PMI will automatically go away once your reach 78% loan-to-value though payments alone. You must have made at least 24 mortgage payments before this can happen.
6. Most conventional lenders require a 660 minimum credit score., and a few will go to as low as a 620 score
7. Conforming conventional loan interest rates vary greatly by credit score in 20 point increments. Someone with a 660 credit score could be paying as much as 1/2% higher interest rate than someone with a 760 credit score.
Although this quick summary shows some of the key differences between FHA and Conventional financing, there could be other considerations which will make one loan product more beneficial to you than the other..
It can be overwhelming. That is why is is so important to deal with an experienced, and licensed mortgage professional – not just the unlicensed application taker at the bank or credit union. Sadly, around 80% of “Loan Officers” are mere application takers, with little to no qualifications to consult or properly advise a potential first time home buyer. Be sure to only work with an actual licensed loan officer.