FHA Loan With 3.5% Down vs Conventional 97 With 3% Down
FHA Loan vs Conventional 97
- Credit score: Buyers with low to average credit scores may be better suited for a FHA loan. FHA mortgage rates are much lower than conventional ones for candidates with dinged credit. Also FHA loans allow credit scores down to 580.
- Down payment: You get a lower down payment options with conventional, at just 3% down. FHA requires three and a half percent down.
- Long term goals: Conventional mortgage insurance is cancelable when your home attains 20% equity. FHA mortgage insurance is payable for the life of the loan and can only be canceled with a refinance. Buyers who plot to remain in the home five to ten years may opt for conventional.
Which Is Better FHA Or Conventional 97
There are multitudes of low down payment options. But for today’s home buyers, several will have to choose between the FHA 3.5% down payment or the Conventional 97. So, which loan is better for you. But you also need to consider how this would affect you and that all depends on your current circumstance.
For example, in deciding between a FHA loan and the Conventional 97, your individual credit score matters. This is because your credit score determines whether you are program eligible and it affects your monthly mortgage payment, too. FHA loans are available with credit scores of 580 or better.
The Conventional 97 loan, by contrast, requires a minimum credit score of 620. And, most conventional lenders are required to have an even higher score than that. Therefore, if your credit score is between 580 and 620. The FHA loan is your best choice because it is your only available option.
As your credit score increases, though, the Conventional 97 gets more attractive. Your mortgage rate drops (compared to low credit Conventional 97 rates) and your PMI costs do, too. This is different from how FHA loans work.
The Differences Between FHA Loan Vs Conventional 97
With a FHA loan, your mortgage rate and MIP cost the same no matter what your FICO score. Over the long term, borrowers with above average credit score will find Conventional 97 loans more economical relative versus FHA. So in the short term, FHA loans will win over Conventional 97.
Assuming a loan size of $250,000 and today’s mortgage rates, FHA loans are 10% cheaper for borrowers with excellent credit scores. For borrowers with weak credit, they are 26% cheaper. But, this does not mean FHA loans are best.
You have to consider, for how long will I need this mortgage? Remember: FHA MIP is forever but Conventional 97 mortgage insurance goes away at 80% loan to value. This means that, over time, your Conventional 97 can become a better value, especially for borrowers with high credit scores.
It is hard to know for how long you will hold a loan, though. Sometimes, we expect to live in a home for the rest of our lives and then our circumstances change. Or, sometimes mortgage rates drop and we have given the opportunity to refinance.
As a general rule, though, in rising value housing market, if you plan to stay in the same home with the same mortgage for longer than six years, the Conventional 97 may be your better long term fit. Lastly, consider upfront charges. The FHA charges a separate mortgage insurance premium at the time of closing, which is known as Upfront MIP.
Upfront MIP costs 1.75% of your loan size, is added to your balance, and is non-recoverable except through the FHA Streamline Refinance. Upfront MIP is a cost. The Conventional 97 charges no equivalent or like fee.
Additional Low Down Payment Mortgage Options
Today’s mortgage rates are low and rents are rising nationwide. In many U.S. markets, the answers for the question, should I rent or should I buy, now has been shifted towards buying. Even better, first-time home buyers have ready access to low down payment loans.
Recently, mortgage lenders reduced minimum credit score requirements for the FHA’s popular 3.5% down payment loan and two 3% down payment programs have been retooled, the Conventional 97 and the Fannie Mae HomeReady™ mortgage. Add to these two programs the 100% VA loan backed by the Department of Veterans Affairs and the no money down, rural housing loan from the U.S. Department of Agriculture (USDA), and you will find today’s home buyers with no shortage of low and no down payment home loan options. For many buyers, though, the choice among low down payment loans will be between the FHA loan and the Conventional 97. This is because VA loans are available to military borrowers only, USDA loans are restricted to suburban and rural areas, with maximum income limits, and HomeReady™ has similar income restrictions.
So, which is the better mortgage to choose from the FHA loan vs Conventional 97?
About The FHA 3.5% Down Payment Program
The Federal Housing Administration (FHA) is not considered a lender they are more known as being a loan insurer. The federal agency was established in 1934 and exists to support home-ownership within communities. The FHA played a crucial role in the post-depression housing market.
In the 1930s, it was difficult to get a home loan. Home Loan terms were meant for five years or less, which means that loans were required to be completely paid off in 60 months or fewer. Minimum down payment amounts was set at 50% of the purchase price. Plus, homeowners were given little protection from cash strapped banks. Which may have been forced to foreclose just to keep a strong balance sheet.
Then came the FHA it promised affordable and stable financing. FHA established a program by which it would insure U.S. lenders against losses on a loan and provide more favorable loan terms for U.S. borrowers. More than 80 years later, the FHA continues to fulfill its role.
Today’s FHA homeowners get access to loans of up to 30 years, minimum down payment requirements are as low as 3.5%. And, FHA mortgage rates routinely beat the market average, often by a quarter percentage point or more. To get the FHA’s backing, banks must only verify that loans meet minimum FHA lending standards, a collection of rules which are more commonly known as the FHA mortgage guidelines.
About The FHA Mortgage Guidelines
FHA mortgage guidelines state that eligible home buyers must have documented, verifiable income, for example and require home buyers to live in the home being purchased. The FHA also requires home buyers to pay mortgage insurance premiums (MIP) as part of their monthly payments. FHA MIP varies by loan type and down payment, with the most common scenario being a home buyer using a 30 year fixed rate FHA loan with the minimum allowable 3.5% down payment and paying 0.85 percent against the borrowed amount in mortgage insurance premiums annually, or $71 per month per $100,000 borrowed.
The FHA cancels FHA MIP after 11 years for loans which started at 90 percent loan to value (LTV) or lower. For everyone else, FHA MIP must be paid until the loan is paid in full or refinanced into a non-FHA loan. The FHA is the largest insurer of mortgages in the world. It currently insures close to one in four new U.S. mortgages.
About The Conventional 97 LTV Program
The Conventional 97 loan is another low down payment option available to today’s mortgage borrowers. This program was recently retooled to be cheaper and easier to use. For example, as compared to the original Conventional 97, the newest version is available to first-time buyers and repeat buyers alike. Where first-time buyer is a person who has not owned a home in the last three years.
This definition of first-time buyers means that any consumer who has lost a home to foreclosure last decade can now be Conventional 97 eligible under the program’s new rules. Furthermore, because Conventional 97 allows for cash gifts for down payments, home buyers are not required to make a down payment from their own funds. Monies may be 100% gifted from parents and relatives. The only requirement is that the gift is actually a gift, down payment loans are disallowed.
For eligible borrowers, the rules of the Conventional 97 program are straightforward. The Conventional 97 program requires a minimum down payment of 3%, only 30 year fixed rate mortgages are allowed, and the loan must be used for a primary residence. Beyond that, there is very little to distinguish a Conventional 97 loan from any other conventional mortgage type.
Borrowers are required to verify income and employment, the program refinances a home and home buyer counseling is not required. And, like other conventional loans, because Conventional 97 loans feature less than 20 percent home equity, they require borrowers to pay private mortgage insurance (PMI). With all Conventional 97 loans, though, PMI cancels when the loan reaches 80% LTV. That is, when the homeowner has 20% equity in its home.