“This is such an important decision.  During the last couple of years Conventional was really the only way to go.  However, recently FHA has altered their guidelines and they have become a viable option again for some buyers.  Make sure you know all the options when you talk to your lender.”

Denise Buck & Ed Johnson – DC Metro Realty Team

Buyers with a minimum down payment are generally faced with the decision of whether to get a FHA or a conventional loan. With the new 3% down payment program on conventional loans, it may become more confusing which loan to pursue.

The two loan programs have mortgage fees that can differ greatly. FHA has a 1.75% up-front mortgage insurance charge in addition to the monthly mortgage insurance charge which was recently lowered by .5%.

FHA’s mortgage insurance is a fixed amount where conventional mortgage insurance providers’ fees are determined by individual companies and according to the credit score of the borrowers. A borrower with a good credit score will be charged less than a borrower with a marginal credit score.

Mortgage insurance on conventional loans can be cancelled when the equity in the property reaches 20%. FHA mortgage insurance in most cases, is paid for the life of the mortgage. Once a borrower has a 20% equity in their home, to eliminate the monthly FHA mortgage insurance, they would need to refinance the home with a conventional loan and would not be eligible for any refund of the up-front fee paid at closing or added to the mortgage.

If a borrower has a low credit score, FHA may be the better choice because conventional underwriters may have a higher minimum score. FHA loans also tend to be more lenient than conventional loans when a borrower’s total monthly debt exceeds 45% of their monthly income. FHA tends to allow borrowers a shorter time frame after foreclosures and bankruptcies.

The decision-making factor is which mortgage will provide the lowest cost of housing including payment and all loan fees. A lot of information is necessary to make a good decision and typically, the borrower isn’t able to acquire it on his/her own.

A trusted mortgage professional is very valuable in not only providing the information but guiding the borrower through the entire process. Your real estate professional is uniquely qualified to make such a recommendation.