Differences between FHA and Conventional Mortgages

When seeking to finance a home, you will most likely be using one of two types of programs, Conventional or FHA.

Each program has its place in the mortgage landscape, and in this article we will get into the basics of each so we can help you find the type of loan that is best for you.

FHA financing is wildly popular among first time home buyers while conventional financing is the choice for many who are refinancing and qualify for rock bottom rates. FHA and Conventional are at the very core of traditional financing.

Both programs are open to all, so let’s see which one works for you.

FHA Mortgages

FHA is a government insured mortgage program that is overseen and administered by HUD, or the Department of Housing and Urban Development. This program has become more popular lately as it has more flexible guidelines than its conventional counterpart, but at the same time can cost a few extra dollars more each month.

When using FHA, expect to put at least 3.5% of the purchase price in as a down payment. This can come from either your own documented funds, or those documented from a wide range of other sources, such as a gift.

While credit scores vary from lender to lender, you will be looking at a minimum credit score of 620 to be able to qualify for a conventional mortgage, while FHA will allow you to go lower. Other factors such as reserve money, down payment and depth of credit history will sometimes allow for lower credit scores.

Mortgage Insurance

FHA requires mortgage insurance, two different types in fact, for a majority of borrowers.

The first is called the upfront mortgage insurance premium (UFMIP), and is a percentage (approximately 1.5%) of the total amount that you are borrowing.

It can be paid outright at closing, or can be rolled into the loan amount and paid monthly. FHA is not unique in requiring this upfront mortgage, USDA and VA financing also require UFMIP, while conventional mortgages do not.

The second type of mortgage insurance is called monthly mortgage insurance and this will apply regardless of your down payment. FHA mortgage insurance will need to be in place for a minimum of five years, regardless of how much you are able to put down, or how much the property may increase in value during that time.

Conventional Mortgages

Conventional mortgages (aka conforming mortgages), which are purchased by Fannie Mae and Freddie Mac, are for those borrowers who qualify under stricter guidelines than those looking at FHA as an option.

Credit scores for Conventional mortgages need to be a minimum of 620, and rates may vary depending on your specific score. If you currently have scores in this range, a Conventional mortgage may be for you.

Expect to put down  between 5% and 25%, depending on your property use.  First time buyers with credit profiles meeting conventional guidelines can put down as little as 3% under new programming.

Monthly Mortgage insurance (aka MI) only applies if you are putting less than 20% down, but if you are putting 20% or more down, there will be no monthly mortgage insurance.

Common Misconceptions

Many people believe that FHA mortgages are only for low income borrowers, this isn’t the case. All income ranges can and do use FHA financing for both purchase and refinance transactions. However, unlike conventional, FHA is only for the purchase of a primary residence.

Many believe that FHA mortgages are slow to close, this isn’t true either. FHA mortgages can close just as fast as a conventional mortgage.

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If you have questions about which mortgage program is right for you, please discuss with your mortgage professional.  Our in-house origination, underwriting and closing staff will make your next mortgage transaction go as smooth as possible.