Low Down Payment Mortgage Options

FHA or Conventional – Whats The Best Mortgage Choice?

Phoenix area home buyers looking to purchase a home and keep their down payment low are often pigeonholed into an AZ FHA loan (a great loan however it may not be your only choice).  One reason is that some Arizona mortgage lenders do not have or are not aware of new Conventional low down payment mortgage options.  So, if you are looking to buy a home with a small down payment do not let your lender see you like casting directors see Tom Cruise and typecast you into a standard loan program.  By the way, is it me or does a Tom Cruise movie always have at least one intense scene that features him in an all out dramatic sprint?  Instead make sure you are seen more like a Robin Williams and matched against all the mortgage options that may work for you (I am a big Good Will Hunting fan and Mrs. Doubtfire always makes me laugh).

The differences between the broom dancing, house cleaning and fruit throwing Mrs. Doubtfire and the intellectual, mind stimulating deep thinking professor that challenged Matt Damon are just as drastic as the differences between an FHA loan and a low down payment Conventional mortgage.  So before you jump into either an FHA loan or a Conventional loan make sure you know all of your options.  Let’s examine how these two great mortgage choices differ.

Difference #1: Down Payment Requirements

FHA Minimum Down Payment: 3.5% down

Conventional Minimum Down Payment: 3% down (yes – less than FHA)

Difference #2:  Mortgage Insurance Costs

Mortgage insurance costs and options are very different between an FHA loan and a Conventional loan.  To clearly analyze the mortgage insurance differences, we need to break this up into two comparison sections.  First, we need to compare a 3% down Conventional loan with a 3.5% down FHA mortgage.  Here is a look at mortgage insurance costs on a $200k mortgage for both options:

FHA Monthly Mortgage Insurance Cost: $208/month
FHA Up Front Mortgage Insurance Premium Cost: $3,500 (one time charge added to your FHA loan)

Conventional Monthly Mortgage Insurance Cost: $183 (depending on credit score)
Conventional Up Front Mortgage Insurance Premium Cost:  N/A

Now let’s consider a Conventional loan with 5% to 6% down versus an FHA loan.  When an Arizona buyer puts 5% to 6% down and uses a Conventional mortgage, some very interesting and financially advantageous (aka – cheaper) mortgage insurance options become available.  To keep it simple (because this gets a little complicated) just know that in the 5% to 6% down payment range on a Conventional mortgage there is an option to completely eliminate monthly mortgage insurance.  When compared to a $200k FHA loan one of your Conventional mortgage options in the 5% to 6% range can lower your monthly payment by approximately $208 per month.

Difference #3: Credit Score Requirements

FHA currently requires a minimum score of 620.  With less than 20% down on a Conventional mortgage you must have a credit score of 660.  In addition, the interest rate a borrower with a 660 score on a Conventional loan would receive would be significantly (possibly .375% to .75%) higher than whatever the current par or market rate is.  In contrast, an FHA borrower with a 620 score may receive a rate that is just .125% or .25% above current rate levels.  FHA is much less sensitive to credit score compared to Conventional financing when it comes to interest rate.  A low credit score will raise your Conventional interest rate much more than it will your FHA interest rate.

Difference #4: Debt to Income Ratio

In short, an FHA loan will allow a borrower to carry more and qualify with more debt than a Conventional mortgage will.  FHA guidelines allow a qualified borrower to have total monthly debt payments including their new mortgage payment equal to 56.99% of their gross monthly income.  Conventional mortgage rules cut that same debt to income ratio to 45% (50% in some special cases).  Some Phoenix area buyers utilize an FHA loan simply due to the fact that their debt to income exceeds Conventional guidelines.

Difference #5: Buying After a Foreclosure, Short Sale or Bankruptcy Timeframes

The amount of time a borrower must wait in order to qualify for an FHA loan after a bk, short sale or foreclosure is typically MUCH shorter than how long they must wait before they can go out and obtain Conventional financing after these three derogatory items.  Check out the following for more info on this:

Learn more about buying after a short sale timeframe outline
Learn more about buying after a bankruptcy timeframe outline

You can also email me for a chart that details when you can buy after a bk, foreclosure or short sale for every available loan type including VA and USDA.

As you can see, there are several major differences between an FHA loan and a Conventional loan.  There are more subtle differences not listed here that may or may not impact your ability to qualify for either type of mortgage.  Please email or call me if you would like to do a side by side comparison to figure out which option would best suit you.

By Jeremy House
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