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FHA vs Conventional

FHA vs Conventional

In this article, I'll go over my findings on what home mortgage will be a better solution for you. Read full article...
Before I go anywhere else, let me first clarify that FHA, the mortgage for a first home buyers, is still a mortgage, just like a conventional. FHA does not mean you borrow money from the government. FHA (Federal Housing Administration) is sort of a government order, requiring less downpayment for a first home buyers.

With FHA, buyer needs to pay only 3.5% downpayment towards the house price. If you have a conventional loan, you are required to pay anywhere from 5% to 20%, depending on the mortgage company/lender and your credit score.

If you don't know much about FHA, you might be thinking now that FHA is definitely a better choice if you don't have much money, however, there are some drawbacks. I'll get straight to the point. With FHA, you are required to pay monthly mortgage insurance for the lifetime of your mortgage. That means, if you are going to have the mortgage for 30 years, every month you have to pay a good amount of money for the insurance. I am not too sure with the exact number, but I believe if your house price is $200,000, you will need to pay about $200 a month for the insurance. Even if you got left to pay $5,000, you have to pay mortgage insurance until your house is completely paid off. Keep in mind that whether you have bad credit score or a really good one, under FHA, EVERYBODY pays same percent for mortgage insurance.

On top of that horrible mortgage insurance, you are required to pay something called Upfront Mortgage Insurance. Upfront Mortgage Insurance requires you to pay good amount of money upfront. Once again the number may vary, but I believe its somewhere between 1% - 1.5%. On $125,000 I would be required to pay about $2,200. Good thing is that this amount can go towards mortgage loan, but its extra money to pay off later.

Now let's look at conventional loan. I'll compare it with FHA as I talk about it. Down payment requirement is from 5%-20%. The amount of down payment depend on your credit score/history and your mortgage lender. Be sure to read my article on credit scores as you may need it to obtain a house with good mortgage rate.

With conventional loan, you do not need to pay an Upfront Mortgage Insurance whatsoever. Speaking of monthly mortgage insurance, you are required to pay it until you pay off 20% of your house. Keep in mind that with FHA, you are required to keep monthly insurance until all house is paid off. Another good thing is when it comes to conventional loan, your monthly mortgage insurance amount depends on your credit score and most of the time it will be less that monthly mortgage rate of FHA.

Now let me just conclude by telling you which loan you need. You may need to get FHA if you have a pretty bad credit score and can't get a good amount for a down payment. Now keep in mind that if you get FHA, you will need to pay mortgage insurance for 15 or 30 years or until your house paid off. On top of it, you'll need to pay off your Upfront Mortgage Insurance. Now that you see that, you can either take the FHA and try to pay it all off as soon as possible or just be stuck with the payments. You can also wait on a house purchase and try to build your credit score and at the same time get a good down payment to aim for a conventional loan.

Speaking of conventional loan. If your score is good (hopefully above 700) and you have at least 5% downpayment towards the house purchase, definitely go with a conventional loan. You will not be sorry that you made that decision. You will save on Upfront Mortgage Insurance, monthly mortgage insurance, and you'll be able to cancel (or it will cancel by itself) your monthly insurance fee once 20% of your house paid off.

Now if you have any other questions or suggestions, please feel free to leave your comments below.

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