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Can I just go with an FHA loan even though I qualify for Conventional with 20% down?

Can I just go with an FHA loan even though I qualify for Conventional with 20% down?

Short Answer:

Yes, as the borrower you can choose the mortgage type and product you want. If you don't have an FHA already, you should be able to qualify for an FHA mortgage if you qualify for a Conventional. If you have an FHA mortgage already, you might qualify for an exception to the 1 FHA mortgage, at a time.

Longer Answer:

When you're under contract for a home and qualify for a 30-year fixed conventional loan with 20% down, it's natural to explore all your options, including FHA loans. While FHA loans can sometimes offer more attractive interest rates, there are several factors to consider before deciding to go this route, especially when you qualify for a conventional loan.

Key Differences Between FHA and Conventional Loans

  1. Mortgage Insurance:
    • FHA Loans: Require both an upfront mortgage insurance premium (UFMIP) (1.75% of the loan amount) and a monthly mortgage insurance premium (MIP), regardless of the down payment amount. Even with 20% down, you'll still need to pay these premiums, which can add up over time. Finally, FHA mortgage insurance is on for the life of the mortgage except when putting more than 10% down.
    • Conventional Loans: With a 20% down payment, you can avoid private mortgage insurance (PMI) altogether, potentially saving you thousands over the life of the loan.
  2. Loan Limits:
    • FHA Loans Have lower loan limits than conventional loans, which might restrict your purchasing power depending on the area.
    • Conventional Loans: Typically offer higher loan limits, providing more flexibility in high-cost areas.
  3. Property Requirements:
    • FHA Loans: Often have stricter property condition requirements, which could lead to additional repairs or improvements before closing.
    • Conventional Loans: Generally have more lenient property standards, allowing for a smoother transaction process.
  4. Interest Rates and Mortgage Insurance
    • FHA Loans: Mortgage insurance for FHA loans is not determined by credit scores. Rather, it is the same whether you have an 800 credit score or a 600 credit score. Similarly, interest rates are less driven by credit scores compared to their conventional counterparts.
    • Conventional Loans: Interest rates and mortgage insurance depend upon the borrower's credit scores and the amount of down payment.
  5. Long-term Costs:
    • FHA Loans: The ongoing cost of MIP can make FHA loans more expensive in the long run, even if the initial interest rate is lower.
    • Conventional Loans: Without PMI, the overall cost of the loan can be significantly lower over time.

Why Choose an FHA Mortgage?

  1. Credit Flexibility: If your credit score is low, an FHA loan might offer more favorable terms than a conventional loan.
  2. Qualification Ease: FHA loans can be easier to qualify for if you have a higher debt-to-income ratio or other financial considerations.
  3. Self-Employed Income: In certain instances, FHA can allow for qualification with less than 2 years of self-employment history.
  4. Multi-Family Homes: FHA allows for multi-family homes (2-4 units) with as little as a 3.5% down payment.

Conclusion

While FHA loans might seem appealing due to potentially lower interest rates, the additional costs associated with mortgage insurance and stricter property requirements can outweigh the benefits, especially when you qualify for a conventional loan with 20% down. It's essential to evaluate the long-term financial implications and consult with a mortgage advisor to determine the best option for your specific situation.

If you have questions about the difference between FHA and Conventional mortgages, please reach out to me at teamjd@mainstreethl.com

These blogs are for informational purposes only. Make sure you understand the features associated with the loan program you choose, and that it meets your unique financial needs. Subject to Debt-to-Income and Underwriting requirements. This is not a credit decision or a commitment to lend. Eligibility is subject to completion of an application and verification of home ownership, occupancy, title, income, employment, credit, home value, collateral, and underwriting requirements. Not all programs are available in all areas. Offers may vary and are subject to change at any time without notice. Should you have any questions about the information provided, please contact me.

Find more answers to mortgage & real estate questions at www.jdanswersquestions.com

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