The Question First-Time Buyers Ask More Than Almost Any Other

Should I use FHA or conventional? It is one of the questions Andrea Kling receives most frequently from first-time buyers and the honest answer is that it depends. It depends on your credit situation, how much you have saved, and what your plans look like going forward. Here are the key differences so you arrive informed to your conversation with your loan officer.

Down Payment Requirements

FHA loans generally require a minimum of 3.5 percent down. Conventional loans can start as low as 3 percent although the exact percentage depends on your credit profile and the specific program you qualify for.

The difference in percentage may seem small but on higher-value properties it represents a real difference in the cash you need available at closing.

Credit Requirements

FHA tends to be more flexible with lower credit scores which makes it a popular option for buyers who are rebuilding their credit history or who are newer to the US credit system.

Conventional loans generally require a higher score to access the best terms. That does not mean qualifying with a moderate score is impossible but the conditions you receive improve significantly as your score rises. If your credit is still a work in progress FHA may be your best entry point while you build toward a more competitive range.

Mortgage Insurance: The Most Important Difference

This is one of the differences that most significantly impacts the total cost of the loan over time and it is the one buyers most often overlook when comparing options.

FHA requires mortgage insurance known as MIP that in most cases stays for the entire life of the loan if the down payment is less than 10 percent. That means even if you build substantial equity in your home the insurance does not automatically disappear unless you refinance into a different program.

Conventional loans use PMI which works differently. Once you reach approximately 20 percent equity in your property PMI can be cancelled. Over the long term that can represent significant savings compared to the permanent MIP that comes with most FHA loans.

Loan Limits

FHA has loan limits that vary by county and are generally lower than conventional limits in many areas. This matters particularly in markets like the DC, Maryland, and Virginia area where property prices tend to be considerably higher than the national average. If you are looking at a higher-value property FHA may not cover the amount you need and conventional may be your only viable option.

Property Type

FHA is designed primarily for the purchase of your primary residence and has specific rules about property condition. Not every property qualifies for FHA especially if there are certain maintenance or condition issues the program considers unacceptable.

Conventional loans offer more flexibility for second homes and investment properties and are generally less restrictive about property condition requirements.

So Which One Is Right for You

If your credit is still being built or your savings are limited FHA can be your best entry point into homeownership. If you already have solid credit and want to avoid paying mortgage insurance over the long term conventional is likely the better fit. But the only way to know for certain is reviewing your specific situation with someone who knows both programs thoroughly.

Do Not Decide Based Only on What You Read Online

Every situation is different and choosing the wrong program can cost you thousands of dollars over the life of the loan. Before you decide have a 15-minute conversation with Andrea Kling to review your credit, your income, and your goals. That conversation tells you exactly which program makes sense for your situation rather than making a guess based on general information that may or may not apply to your specific case.

Do you already know whether you prefer FHA or conventional or do you still have questions? Reach out to Andrea Kling and figure it out together.

Sources

HUD.gov
FannieMae.com
ConsumerFinancialProtectionBureau.gov
MortgageNewsDaily.com
Investopedia.com