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:
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.