First time buyer with good credit (760) and debt-to-income ratio. Better rate with convention or FHA with 20% down.

Asked by Jgmacarthy, Massachusetts Tue Dec 29, 2009

I am wondering if I would typically get a better rate with a conventional loan or an FHA loan if I put 20% down and have good credit (760). (looking at 30-year fixed only)

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, ,
Tue Dec 29, 2009
With that score and that down payment, no question conventional is the way to go. Even if the rates are higher.

To go into detail of what Gregory and Jeff have mentioned, FHA loans ALWAYS require a 1.75% upfront insurance premium, which is equivalent to a 1.75% fee. Price any conventional loan with 1.75% in discount points and the rate will always be lower than FHA.

FHA also requires monthly mortgage insurance on ALL MORTGAGES amortized longer than 15 years regardless of the down payment. Yes, that means you pay insurance on 30 year loans including ones with a huge down payment. The premium is .55%.

For someone in your situation, you should only consider a FHA loan if, for some reason, you do not qualify for a conventional loan outside the down payment and credit score. FHA does have unique guidelines that conventional loans do not have. There's a chance you may only qualify for a FHA loan if you have a unique scenario.

FHA really shines for clients with average to lower credit scores and smaller down payments. It's also a great alternative to HARP loans for clients who have little to no equity, especially when the lack of equity is due to a 2nd mortgage.

Lastly, FHA is a great option for clients who have less than 80% equity but at least 90% who are looking at 15 year loans. While FHA always requires mortgage insurance on loans longer than 15 years, they only require 10% equity on a 15 year loan to avoid mortgage insurance. Conventional loans always require 20% down regardless of the term.
1 vote
Gregory Dousa, , Massachusetts
Tue Dec 29, 2009
Conventional financing is definately the way to go.
Regardless of how much $ or % you're putting down, FHA will always have the up front mortgage insurance premium (which can be financed) and then the monthly mortgage insurance premium (MIP).
1 vote
Ken Lambert, , Exeter, NH
Wed Dec 30, 2009
Hello- Good answers below. With our company, the FHA rates are generally 1/8 % better than the conventional rates- but after you factor in the Mortgage Insurance Premiums with FHA, conventional is the way to go for sure.

FYI- Conventional rates for someone in your shoes would be between 5.125%- 5.25% most likely. This is not a rate quote; I'm just giving you some parameters. This is with no points charged, BUT there are typical closing costs associated. Hope that helps.
Please contact me if you need further help with anything. We have numerous offices all over Mass. Thanks and good luck,

Ken L.
0 votes
Jeff Chin, , 02459
Tue Dec 29, 2009
I'll second Gregory's answer if your property is a single family. If your looking at condominiums, there are many that have occupancy issues that are not acceptable through conventional guidelines. If your optioning for a multifamily, FHA does not make adjustments to pricing like conventional programs. Work with someone that can look at these scenarios and crunch the numbers for you.

Best of luck with your search.
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Tom and Joan…, Agent, Boston, MA
Tue Dec 29, 2009

I am a Realtor, but from what I have heard in the industry you would get a better rate in the FHA program. Additionally, if you are putting 20% down you could ask the seller to contribute money back to you for closing costs and use this money to buy your rate down. This would be a tremendously creative way. Additionally, most FHA loans are assumable so if the market dips before you want to sell, but interest rates are up you could sell your loan as well. Hope this helps.
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