Buying your first home should be handled with extreme care including selecting which mortgage loan program makes the most financial sense. Following is what you ought to consider when looking at both mortgage loan programs …
Loans backed by Fannie Mae and Freddie Mac are conventional loans which require a minimum down payment of 5 percent if your loan amount exceeds the conforming loan limit $484,350 in the area in which you’re looking to purchase a home. If you’re looking to purchase a home within the conforming loan limit the minimum down payment you would need is 3 percent. Conventional loans may contain monthly PMI if you’re working with less than 10 percent down.
FHA Loans are insured by the Federal Housing Administration. The FHA insures the loan in the event you default on the mortgage. FHA Loans typically have better interest rates associated with them than conventional loans but can otherwise be slightly pricier due to the upfront mortgage insurance premium (ufmip for short) and the additional annual mortgage insurance premium on a monthly basis.
So, should you go FHA or conventional? Consider the following possibilities when deciding what makes the most sense…
If you have some credit issues going FHA especially if you’re working with 3.5 percent down is almost always a better bet. The rates are lower than conventional and they’re much less expensive in terms of loan costs.
If the property is a condominium this might be more geared towards conventional as FHA requires special approval.
If your credit is at least a 700-credit score or more and you could go FHA with 3.5 percent down or conventional with 5 percent down all things being equal, with a good sound financial profile both local programs mirror each other.
Some oddball scenarios to consider.
If you pay alimony it comes off income regardless if you’re going conventional loan or FHA. This gives you more borrowing power because it comes off income it’s not counted as a debt.
If you’re looking at a manufactured home, it is almost always it’s better to go FHA with a than conventional as it’s more likely to pass automated underwriting. However, if you have 20 percent down and you have good credit, at least a 700-credit score or better a conventional loan would be a better bet. If your credit score is less than 700 and you have less than 20 percent down to work with and you’re looking at a true or manufactured home FHA is it better in most cases.
Conventional loans allow a debt to income ratio of up to 50 percent whereas FHA loans will go up to 55 percent if your credit score is in the mid 600s for example.
Ultimately at the end of the day you want a lender willing to lay out both options for you and explain the pros and cons of each so you can decide what ultimately makes the most sense for you and your family.
Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.