Home buyers with a small down payment often struggle with the choice between FHA and Conventional loans. Rightly so, as there are several factors that need to be considered before a recommendation can be made.

On one hand, FHA has more liberal qualifying guidelines and a lower interest rate. They are also more profitable for lenders, so there is company-side pressure to sell them. On the other hand, FHA has a large up-front mortgage insurance premium and the monthly mortgage insurance is permanent.

If there’s a cornerstone for making the decision, it is that interest rates and private mortgage insurance rates for Conventional loans are both highly sensitive to credit scores. I find that most of my higher credit score clients who qualify for the first-time home buyer “3% Down” programs are usually better off with a Conventional loan. For those who don’t qualify for 3% down conventional, the 5% down payment may be the reason for choosing FHA. Even if it isn’t the most financially beneficial option.

Here’s a matrix that identifies some of the considerations:

Summary

Everybody’s situation is unique. What is right for one person is not necessarily good for another. Both products are quality loan programs that serve their purpose to put people in a home with a very small cash down payment. We recommend speaking with a certified Home Loan Advisor™ to help you decide whether an FHA or Conventional loan is best for you.