FHA vs. Conventional Mortgage: Pros and Cons - Capital Bank (2024)

FAQs

Is it better to accept a conventional loan or FHA? ›

An FHA loan may be a better option if you have a lower credit score, a higher DTI ratio, or less money saved for a down payment. On the other hand, a conventional loan may work better if your finances are sound and you can qualify for favorable loan terms.

FHA loans require borrowers to pay mortgage insurance premiums (MIPs) at closing and throughout the life of the loan. Specifically, you'll pay 1.75% of the loan amount at closing as your upfront MIP. Then, you'll pay MIPs of 0.15% to 0.75% of the loan amount every year.

When deciding between a conventional loan vs FHA loan, you'll have to compare costs and benefits based on your personal finances. A conventional loan is often better if you have good or excellent credit because your mortgage rate and PMI costs will go down.

Sellers often prefer conventional buyers because of their own financial views. Because a conventional loan typically requires higher credit and more money down, sellers often deem these reasons as a lower risk to default and traits of a trustworthy buyer.

Lack Of Earnest Money And Down Payment

Unfortunately, the typical home buyer using an FHA loan is unlikely to have excess cash upfront. If a home buyer has less cash to put toward a down payment, they may be less likely to be approved for a mortgage, depending on the state of their finances.

Conventional mortgages are also a popular choice for home buyers making a down payment of 20% or more. That's because paying more upfront means lower monthly payments and avoiding paying private mortgage insurance (PMI). Don't worry, if you're unable to make a large payment upfront you still have options.

Some reasons a seller might refuse an FHA loan include misconceptions about longer closing times, stricter property requirements, or the belief that FHA borrowers are riskier.

Because FHA closing costs include the upfront MIP, an FHA loan can have average closing costs on the higher end of the typical 3% – 6% range. That doesn't diminish in any way the value of getting an FHA mortgage, with its low down payment, lower interest rates and flexible underwriting.

FHA loans have more flexible borrower requirements than some other popular home loans. However, borrowers will have to pay mortgage insurance premiums and meet the FHA's minimum property standards in order to qualify. Assess the potential benefits and drawbacks before deciding whether an FHA loan is right for you.

Your down payment amount: A down payment of 20 percent or more results in no PMI. Below that cut-off, there can be a significant difference in the amount you'll pay every month, depending on how much money you put down. The closer your down payment is to 20 percent, the less your PMI.

What is the interest rate for a 700 credit score FHA loan? ›

The national average 30-year FHA mortgage interest rate is 6.85%. The average FHA 203(b) loan rate is 3.28%. As of mid-August 2023, a 700 credit score could secure an interest rate of 6.796% for a 30-year fixed-rate mortgage loan of $300,000.

Simply put: if you have an FHA loan term of more than 15 years, have been paying it for at least 5 years, and have an LTV ratio of 78% or less, PMI can be removed from the loan. FHA loans of 15 years or less have the same criteria, minus the 5-year requirement.

These loans are perfect for borrowers with a strong credit history and the funds for a more substantial down payment. Conventional loans offer the ability to avoid the costs of mortgage insurance while also giving borrowers the option of fixed or adjustable rates.

That isn't the worst option, since PMI can be removed once you reach 20% equity, but it's important to consider. Beyond that, you will need a higher credit score to refinance than to secure an FHA loan. This process also will also involve closing costs, which typically range from 2% to 5% of the loan amount.

Yes, you can refinance out of an FHA loan as long as you qualify for a conventional loan with a credit score of 620 or higher and have 5% – 25% equity in your home. If you have 20% equity, you may also be able to remove your mortgage insurance and lower your monthly payment in the process.

Sellers often prefer conventional mortgages because they usually offer lower interest rates and the qualification requirements can be more lenient than those of an FHA loan. Additionally, with conventional loans, sellers may not have to pay private mortgage insurance or other upfront costs associated with an FHA loan.

Unfortunately, sellers often perceive the FHA loan approval process as risky because of the FHA's relatively lenient financial requirements and stricter appraisal and property standards.

Is an FHA or conventional loan better? A conventional loan offers more advantages than an FHA loan if you have good credit (around 680 or higher) and at least 3 percent down. However, if your credit score is in the high-500s or low-600s, an FHA loan might be a more affordable option.

Conventional loans tend to have stricter requirements than government-backed mortgages. But with so many homeowners meeting these requirements, a conventional loan might be more accessible than you think.