FHA or Conventional Loans for Financing?
For mortgage lending, times are changing and what was the best way to finance your home in the past may not be best for you today. For many years, homebuyers most frequently found Federal Housing Administration or FHA loans the best deal overall, compared to conventional mortgages from traditional lenders. While FHA loans still represent the best option for some buyers, new factors may mean that a conventional mortgage is a better bargain, overall, for those who qualify for them.
As Minnesota’s #1 REMAX Realty team, we constantly keep our eye on mortgage lending, and recent changes have changed the lending environment in ways our homebuyers need to understand. Here are some of the factors for both types of loans that may influence your decision:
FHA Mortgage Costs Have Risen for Minnesota Homebuyers
- Increase in Cost – Traditionally, mortgages backed by the Federal Housing Administration have been a mainstay for buyers, particularly first-time buyers. Lower interest payments, easier qualification, and smaller down payments often made an FHA loan the first choice. In some cases, an FHA loan was the only choice. Recently, though, a congressional requirement that the FHA maintain a 2% cash balance for all outstanding loans on hand has caused changes. Those changes are raising prices for FHA mortgages.
- Insurance Cost – Adding to those increases, mortgage insurance costs have risen. A new rule now requires that borrowers keep mortgage insurance active throughout the term of their FHA loan. Instead of being able to drop mortgage insurance once the equity in a home reaches 22% as before, the insurance must be maintained for the entire term of the loan. Assuming a price for insurance of about $100 per month means an additional $30,000 or more paid over a 30-year loan. Despite the low 3.5% down payment requirement for an FHA loan, this new insurance requirement must be considered by any borrower.
- Benefits for Low Credit Scores – Still, FHA loans are still available to borrowers with lower credit scores than with conventional loans and debt-to-income ratios are more flexible for FHA loans. Finally down payments for FHA loans can come from family or friends, unlike with conventional loans. So, FHA loans still may be the best bet for some homebuyers.
Conventional Loans May Be Your Best Choice Today
If your credit score is high and you have the down payment, which can be as low as 5% for some loans, and your debt-to-income ratio is under 40%, you may qualify for a conventional loan. The big difference is the mortgage insurance issue. Once you reach the equity requirements, about 20%, most conventional loans allow you to cancel the mortgage insurance, and that means big savings over the term of the mortgage, compared to an FHA loan. Choosing an FHA loan isn’t automatically the right choice today. Before making a choice, look at the bottom line and determine the total cost of your mortgage over its entire term.
Compare Conventional Loans with FHA Loans Carefully
Financing is an important factor in most real estate transactions, and comparing the cost is just one of the things you can discuss with your experienced, knowledgeable REMAX Realtor during your home search. Our help with explaining and discussing every aspect of your home purchase is a good reason to work with Minnesota’s top-ranked realty team. We’re on your side throughout the experience and have the answers you need to make the best decisions. Our highest priority is your satisfaction. We’re always there for you as you navigate the complexities of buying or selling a home.