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

[Evan Swanson]

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?

[Sasha Mohammed]

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). 

[Evan Swanson]

Thanks for your insight, Sasha. I have considered contacting a mortgage broker. Do you think the savings from using a mortgage broker outpace the fees of using one? 

[Kevin Sobilo]

@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]

@Evan Swanson if you're using a broker for a consumer loan, you shouldn't be paying the broker's fee; the lender pays the broker on consumer loans. there's also caps on how much total points and fees you can be charged on consumer loans. so.... yes :) definitely worth it in your scenario. 

[Michael Plante]

Quote from @Evan Swanson:

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?

 I am curious where you are seeing 3% conventional mortgage rate being offered?

[Sasha Mohammed]

@Michael Plante home possible and home ready both do 3% down, but its a thin needle to thread through because they have income caps to qualify for it, which typically do not align with income minimums needed to meet DTI requirements. plus the rates and MI are so high right now on those, its kind of a moot loan product in today's market. not impossible, but very difficult.

[Michael Plante]

Quote from @Sasha Mohammed:

@Michael Plante home possible and home ready both do 3% down, but its a thin needle to thread through because they have income caps to qualify for it, which typically do not align with income minimums needed to meet DTI requirements. plus the rates and MI are so high right now on those, its kind of a moot loan product in today's market. not impossible, but very difficult.

 Ah lol

I thought it was saying interest rate of 3%

I was thinking hmmmm I want some of that lol

[Isoke Craig]

@Evan Swanson there is a third option. If you connect to a small local bank they tend to offer 0% down loans as long as you will live on the property for a year and the have special programs that help to lower your down-payment (like if you open a direct deposit account with the bank)

[Faruk Al-Hassan]

I think people like FHA loans for the ability to purhcase muli-families with 3.5% down. With some exceptions the vast majority of conventional programs offering low down payments are for SFH only. That said due to upfront premium and longer mortgage insurance on FHA loans; if you can qualify for both loan types on a property at the same terms (rate and dp) the conventional program should be cheaper.

[Mitch Davidson]

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.

[Evan Swanson]

Quote from @Isoke Craig:

@Evan Swanson there is a third option. If you connect to a small local bank they tend to offer 0% down loans as long as you will live on the property for a year and the have special programs that help to lower your down-payment (like if you open a direct deposit account with the bank)

 Interesting. I did not know about this option. I'll look into it. The main local bank in CT is Liberty. 

[Evan Swanson]

Quote from @Mitch Davidson:

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.

Thanks for the insight. I've heard repeatedly that using an FHA loan acts as a disadvantage in a competitive situation.

[Kevin Luttrell]

@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.

[Matt K.]

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

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

[Kathy Moser]

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

[Sasha Mohammed]

@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.

[Dave Skow]

@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)

[Joe Almeida]

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!