Good Credit = 3% Conventional Mortgage 3.5% FHA?

Question

If you have a good credit score and want a low downpayment, is the best option to go with a conventional mortgage?

I was originally attracted to FHA loans due to the low down payments but it sounds like a conventional loan is the better offer if you have good credit. Is this always the case?

Mitch Davidson · Answer

Well said, @Faruk Al-Hassan. @Evan Swanson: If your middle credit score (i.e., whichever is in the middle between Equifax, Transunion, and Experian) is 700+, Conventional will be cheaper overall regarding monthly payment. Mind you, I'm talking about the mortgage lending versions of your credit scores, which tend to be a little lower than what you see online as a consumer. Also, FHA's mortgage insurance will continue for the life of the loan, unlike Conventional where you can request the MI to be cancelled when LTV falls below 80%. And FHA hits you with 1.75% for upfront MI. Most people finance that, so imagine adding $5,250 to your staring loan balance on a $300,000 FHA loan. Additionally, in a competitive offer situation, an offer that says you'll use FHA financing will often disadvantage you compared to Conventional and cash offers. Selling agents often counsel their sellers that FHA is associated with a higher rate of fallout as well as appraisal problems. Regarding advantages for someone that has 700+ credit. FHA requires just 3.5% down on a multi-unit when you plan to occupy one of the units as your primary residence. Conventional, however, requires 15% for 2 units, 20% for 3 units, and 25% for 4 units (actually just 20% for Freddie only). Finally, if I was purchasing my first home using Conventional. and the home was to be my primary, I would still put at least 5% down. The interest rate and MI % improve at 5% compared to 3-4.99%. Hope this helps.

Kevin Sobilo · Answer

@Evan Swanson, also consider mortgage insurance. When you put down less than 20% you end up with mortgage insurance for both an FHA and conventional loan. However when you pay down the conventional loan to a 78% LTV your mortgage insurance drops off OR if you improve the property of the value goes up you can have an appraisal done and get mortgage insurance dropped.

However on the FHA loan the mortgage insurance stays for the life of the loan! So, that can be a real cost when you intend to hold the loan for a long time and not sell or refinance.

Sasha Mohammed · Answer

no, its not always the case. and especially depends on which lender you go with, and when. FHA should have lower rates than conventional, but a lot of retail lenders pocket those margins and offer roughly the same rates for FHA and conventional. Also, right now, most lender's are not wanting those 3% down loans, so they jack up the pricing significantly to deter you from wanting one too.

Personally, i dont put any of my clients in a loan i wouldn't put my mother in, and if this was her dilemma, i would recommend she come up with the additional 2% and go 5% down conventional (even by way of gift funds).

The only way to find out is to compare side-by-side. i would recommend you call a broker, though, as opposed to a retail lender (avoid the quicken loans, lending trees, and loan depots of the world).

Sasha Mohammed · Answer

@Kevin Luttrell im not sure where you read that i said it rarely makes sense. What i did say is that it should be compared side-by-side with FHA to determine if it does make sense.

i just ran a 3% down in our market (OC, $850k pp) through loan sifter, 3% down conventional LPMI ends up costing $100 more per month than a 3.5% down FHA. any given day, any given lender, any given scenario would garner different results. BPMI would give different results. even every buyer with a different goal in-mind would have a different opinion on the matter.

All i'm trying to say is you can't make a generalization in any case, and the only way to find out for sure what the best option is is to crunch the numbers.

Michael Plante · Answer

Ah lol

I thought it was saying interest rate of 3%

I was thinking hmmmm I want some of that lol

Joe Almeida · Answer

Due to the highly competitive market we find ourselves here in CT (and I'm sure many other areas), yes - buyers using FHA financing contingencies are usually out bid by buyers using conventional financing.  There's always the fear that the appraisal inspection with disclose necessary repairs which the sellers have to take care of.  Listing agents bring this to their client's attention when offers are presented.

Conventional with at least 5% down is the way to go!

Dave Skow · Answer

@Evan Swanson- great  question ...FHA loans  will likely be slightly better  priced than conv  loans .....FHA have UFMIP  fee  of  1.75%  ( which is huge)  ..this can be rolled into the loan  but  its  still a large  fee  worth avoiding if you can ...FHA has mortgage ins that is 1) expensive and  2) permanent  .....you cant   eliminate it  other  than  paying off / refinancing the loan   ...there are conventional loan  options that have a  3% min down  payment for  some cases ..if this isnt applicable - then  5% down  is normal Down payment ..

Summary - I think conv  option is better than  FHA in most cases ( esp if credit is  good)

Kathy Moser · Answer

Heres the link for the USDA loan map https://www.usdamortgagesource...

Matt K. · Answer

USDA loan on a rural property...0% down

and USDA definition of rural might not be as rural as your definition haha

Kevin Luttrell · Answer

@Evan Swanson Sasha was incorrect about 3% down rarely making sense, but correct on it depending on the lender. From what I’ve seen with most companies (including ours), if you have excellent credit (740+), doing 3% down conventional ALWAYS makes more sense than FHA. The interest rate will be higher than FHA, but your monthly payment will be lower due to the lower PMI and you won’t get hit with FHA’s 1.75% up front premium.

About using a broker, mortgage brokers certainly can have great rates and programs but don’t think that you only have to find 1 broker and since they can shop it around with multiple lenders, there’s no reason to compare other options. They have built in lender-paid comp plans just like direct lenders have built in margins. Brokers could have good pricing, or their pricing could be higher than everyone else depending on their comp plan. Make sure you compare a few different companies.

Good Credit = 3% Conventional Mortgage > 3.5% FHA?

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