Comparison of FHA or Conventional
- For many years, the only type of mortgage was a conventional mortgage. While it is a good loan product, many borrowers with lower credit scores and down payments were unable to procure this type of mortgage. Therefore, the Federal Housing Administration under the direction of the United States Department of Housing and Urban Development created the FHA mortgage program to help lower income borrowers pursue their dream of home ownership.
- Each mortgage type has the same basic function, to allow borrowers to purchase or refinance a home. Certain home types, such as manufactured housing, have extensive limitations on funding. Other more rare homes, such as log cabins and house boats, are prohibited from underwriting.
- Both conventional and FHA mortgages have fixed and variable rate mortgage products. Each mortgage has options that range from 10 to 50 years in length, with the most common terms of 15 and 30 years. A borrower can choose between an interest-only mortgage payment and a principle-reducing payment as well.
- The biggest difference between the two types of mortgages is the credit score requirement. The minimum credit score for a conventional mortgage is 620, while it is 580 for a FHA mortgage. However, the interest rate is determined by the credit score of the borrower. The lower the credit score, the higher the interest rate. Yet, with a FHA mortgage, the rise in interest rate for the lowered credit score is less significant than with a conventional mortgage.
- While the interest rate on a FHA mortgage may be more favorable for a borrower with a lower credit score, the closing costs are going to be higher. With an FHA mortgage, there is a required PMI (private mortgage insurance) each month for the first five years of the mortgage, in addition to an upfront MIP (mortgage insurance premium) equivalent to 2.25 percent of the loan amount. This could make the FHA loan more expensive in the long run than the conventional mortgage option.
