Posted October 22, 2012Tweet
Which is better? An FHA mortgage or a conforming one?
With just a few basic facts -- today's mortgage rates, current mortgage insurance premium schedules, your expected downpayment percentage, and your credit score -- you can more easily choose between an FHA mortgage and a conforming one.
First, we'll want to understand how the two products are different.
The two most popular 30-year fixed rate mortgages today are the conforming 30-year fixed rate mortgage as offered by Fannie Mae and Freddie Mac; and the FHA 30-year fixed rate mortgage as insured by the Federal Housing Authority.
Each has its pros and cons.
Among the FHA's biggest appeal to first-time home buyers and repeat ones is that it requires a downpayment of just 3.5 percent. No matter what your property type -- single-family, condominium, 2-4 unit, or something else -- the FHA holds firm at 3.5 percent.
By contrast, a conforming mortgage has varying downpayment requirements.
For example, Fannie Mae and Freddie Mac will allow a 5% downpayment on a single-family home, but to purchase a 2-unit property, that minimum moves to 15 percent, and is for fixed rate mortgages only. Move to 3-4 units, and the downpayment increases to 25%.
For homeowners planning to make a low downpayment, the FHA may offer a more suitable product.
FHA and conforming mortgages also differ in how they use mortgage insurance.
The FHA charges two types of mortgage insurance -- an upfront mortgage insurance premium (UFMIP) and an annual mortgage insurance premium (MIP).
For FHA purchase loans, UFMIP is 1.75% of the borrowed amount, or $1,750 per $100,000 borrowed; and annual MIP on a 30-year fixed rate mortgage varies -- 1.20% for a loan with five percent down; 1.25% for a loan with less than five percent down; and, an extra 0.25% for loans exceeding $625,500.
By contrast, Fannie Mae and Freddie Mac charge zero upfront mortgage insurance and annual private mortgage insurance (PMI) rates are often lower than for comparable FHA home loans.
A second mortgage insurance difference is that the FHA requires annual MIP for all 30-year fixed rate mortgages, regardless of loan-to-value (LTV). Fannie Mae and Freddie Mac require PMI only for loans for which the LTVs exceeds 80%.
And, lastly, with a 30-year fixed rate mortgage, the FHA requires MIP to be paid until two conditions are satisfied : (1) The homeowner must have LTV of 78% or less, based on the current loan size and the original purchase price; and (2) MIP must have been paid for 5 years.
With a conforming mortgage, PMI must only be paid until the home's LTV is 80%.
Another key difference is in the use of risk-based pricing. The FHA takes mortgage borrowers on a Pass/Fail system. Fannie Mae and Freddie Mac do not.
For example, if you're approved for an FHA mortgage, the mortgage rate you get is the day's "market rate". If you're approved for a conforming mortgage, however, you may not get the lowest daily rate.
This is especially true if any of the following conditions are true : (1) Your credit score is not 740 or better; (2) Your loan-to-value exceeds 80%; and (3) Your loan balance exceeds $417,000; (4) You're buying a multi-unit home or a condominium.
These factors can raise your mortgage rates by as much as 0.75%. Combine two or three on the list, and your rate can rise by 1 percent or more.
Mortgage rates for FHA mortgage are based on Ginnie Mae (GNMA) mortgage bonds. By contrast, conforming mortgage rates are based on mortgage bonds backed by Fannie Mae and Freddie Mac.
These are separate products with separate prices.
On some days, FHA mortgage rates are lower than conforming mortgage rates. On other days, FHA mortgage rates are higher than conforming mortgage rates. Currently, mortgage applicants that pay discount points and closing costs will find conforming mortgage rates to be slightly lower than FHA ones.
Applicants opting for no points will get lower rates via the FHA.
With so much difference between the FHA and conforming 30-year fixed rate mortgage, there's no set playbook for choosing the best mortgage. The math will depend on your particular purchase and planned budget.
For example, if you need to make as small of a downpayment as possible, you'll want to choose the FHA. It's 3.5% downpayment program is bested only by the VA's 100% mortgage program for military borrowers, and the USDA's no money down mortgage for suburban and rural homes.
However, as a starting point for comparisons between FHA and conforming mortgages :
These guides have exceptions, of course. A 15-year fixed rate mortgage carries different considerations, for example, as does a home bought "at a steal".
Talk with your loan officer about choosing your optimal route.
For today's home buyer, low FHA mortgage rates may be enticing, but there's more to consider than just the rate. Closing costs matter and so does mortgage insurance as well as add-on fees including upfront MIP and risk-based pricing.
Consider your short- and long-term goals for the home and pick your most suitable loan.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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2014 Conforming & FHA Loan Limits
Mortgage loan limits for every U.S. county,
as published by Fannie Mae & Freddie Mac, and the FHA.