FHA 3.5% vs Conventional loan w/ 3% down payment

Asked by Curtis Russell-Kozik, Atlanta, GA Tue Sep 3, 2013

Prior to becoming informed about the home buying process, I was under the impression that the only way to take advantage of the lowest down payment amount, FHA was the only way to go. Now, after obtaining so much more information, I've heard that individuals can actually decide on a conventional mortgage with an even lower (3%) down payment option. At a high-level, what are some of the distinct requirement differences between FHA vs Conventional with 3%? Do all lenders offer this loan type? Are there higher credit scores needed?

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23
answer
, ,
Wed Sep 11, 2013
Hey Curtis,

Conventional 3% down is a great program but does have stricter mortgage insurance guidelines. Most mortgage insurance companies will not insure anyone with a credit score under 680 for this program.

Both FHA and Conventional 3% require MI. FHA will typically be higher because there annual MI on a 30 year is 1.35%. That being said, you will have a significantly better rate with FHA (if you have a lower credit score) because FHA rates are a lot less credit sensitive and typically lower than conventional in general.

I would be more than happy to discuss this more with you and assess your best option (s).

Feel free to contact me anytime.

Best,

George Cohen
Mortgage Banker
Brand Mortgage Group
678-442-3401
gcohen@brandmortgage.com
NMLS 1078450
11 votes
Tina Jacobs, Other Pro, Frisco, TX
Sat Oct 18, 2014
FHA requires 3.5% down and a minimum of a 580 credit score with some lenders. The Conventional loan program requires 3% down and a 620 credit score. A loan officer will be able to help you decide on the best option for you. You can check with your local bank, or check out a site like The Lenders Network to be referred to lenders that can help you. Good luck!
36 votes
Pamelajain, Home Buyer, Dallas, TX
Thu Jul 23, 2015
In January 2009, the minimum down payment for an FHA mortgage was changed from 3 percent to 3.5 percent. In early 2010, an added level of down payment requirement was established for prospective buyers with low credit scores. An FHA mortgage for a borrower with a credit score of less than 580 requires a 10 percent down payment.

Click here for more information: http://fhamortgageinfo.com/
33 votes
Mario Chandl…, Home Buyer, Denver, CO
Tue Aug 4, 2015
Conventional 3% down is a great program but does have stricter mortgage insurance guidelines. Most mortgage insurance companies will not insure anyone with a credit score under 680 for this program.

Both FHA and Conventional 3% require MI. FHA will typically be higher because there annual MI on a 30 year is 1.35%. That being said, you will have a significantly better rate with FHA (if you have a lower credit score) because FHA rates are a lot less credit sensitive and typically lower than conventional in general.
20 votes
Mike Wilson, , 75201
Sat Nov 28, 2015
If you're looking to compare options as well as compare mortgage rates.....go talk to home loans for all. They do all types of things when it comes to mortgage and real estate. I will include a link to their website.
15 votes
, ,
Tue Sep 3, 2013
Hi Curtis

Recent guideline changes to FHA mandate that on a 3.5% down loan, the PMI will be in place for the entire term of your loan. No getting rid of it. Conventional guidelines dictate that when your equity in the home reaches 20% - either by paying the loan balance down or by the value of the home going up - then you can request the PMI be dropped, so long as you have had the loan for at least 2 years and do not have any late payments in the preceeding 12 months.

So this is a big advantage of 3% down conventional as compared to FHA.

Also, on the conventional program there is no up-front mortgage insurance (1.75% of the loan amount on FHA).

As far as the amount of monthly PMI, this varies depending on your credit score. If you have a credit score over 680 then the monthly PMI will be roughly the same as FHA. For credit scores over 700 and over 760 this amount goes down even more. Below 680 and you may not get approved conventionally, but if you do the monthly PMI will be more than FHA. It's still a good deal though because of the possibility to remove PMI down the road.

With respect to the interest rate, FHA will offer a low rate for all borrowers. On Conventional, the rate could be only a little bit higher or it could be a lot higher depending on your credit score.

FHA does have it's advantages. Some advantages in particular are:
-allows a higher debt to income ratio (sometimes up to 55% while conventional 3% will be cut off around 42%)
- allows gifts from a family member to go towards down payment or closing costs
-allows the seller to contribute up to 6% towards your closing costs as opposed to 3% for conventional
- student loans in deferrment are not counted towards debt to income ratios

The sweet spot to make things overwhelmingly better in favor of conventional financing is about a 720 credit score. You'll pay a little more in rate, but the PMI will be less. So your payment will be about the same, you'll come up with less money out of pocket, and you can drop the PMI down the road. If you are under 720 then you may or may not be better off going FHA.

Feel free to give me a call to discuss the specifics of your situation.

Tony Grech

Loan Officer -NMLS #977416

WCS Lending, LLC
Tony.Grech@WCSLending.com
Toll Free: 866.936.5363 ext. 278
12 votes
I bought a home in June 2012 through FHA, but my PMI goes away once I am under 80% LTV. Did this change? I am thinking of selling soon and curious about options.
Flag Fri Mar 6, 2015
Tony, Thanks so much for providing such a detail explanation! It's greatly appreciated.
Flag Tue Sep 3, 2013
Jeff Hutchis…, , Chicago, IL
Tue Sep 3, 2013
Hi Curtis. Most lenders and banks now offer the fannie mae 3% down loan. Check current rates/fees and compare lenders and banks at http://www.current-mortgage-rates.net so you know you are getting the right loan at the right price for you.
11 votes
Bryan Horn, , 92101
Sun Jul 12, 2015
Not all lenders offer the 3 % down program or the FHA program. The 3% program has lower mortgage insurance fees so that is the better program in most cases.

Contact me anytime for a quote.

Bryan Horn 858-805-5347
9 votes
allan erps,A…, Agent, Pearl River, NY
Sat Sep 7, 2013
Conventional Loans as far as I know require a 20% down payment. Am fairly certain you will be paying some extra fees on that loan(PMI, etc)
8 votes
, ,
Wed Sep 4, 2013
Update: Fannie Mae is updating their underwriting guidelines nov 16. Part of the update is that they are doing away with the 3% down conventional. So if you want to do that you probably have another month or so to get under contract
8 votes
, ,
Tue Sep 3, 2013
Aside from a HomePath mortgage, a Conventional mortgage with 3% down has only recently become more available in Atlanta again. Previously, the MI companies were all requiring at least a 720+ credit score. That has just been lowered to 680+.

In general, Conventional loans have stricter debt to income ratios and are not as forgiving for past credit issues (.i.e Bankruptcy, Foreclosure, Consumer Credit Counseling, late payments, etc).

You have posted a number of questions here. It is very important for you to understand that all answers that you receive are very generic in nature and may or may not apply to your specific situation. I have seen a number of Borrowers go astray because they are relying in generic information rather than sititng down and speaking with a Loan Officer about their exact circumstances.

If you are looking to purchase a property, working with a knowledgeable and seasoned loan officer is critical in today's market. Getting Pre-Qualified is the only way for you to find out your mortgage options. To get Pre-Qualified for your purchase, you can submit your request online at http://www.rodneymason.com.

Regards,
Rodney Mason, NMLS #151088
Sr Loan Officer
Prospect Mortgage
825 Juniper St NE, Atlanta, GA 30308
Office: (404) 591-2453
rodney.mason@prospectmtg.com
Apply Online at http://www.rodneymason.com
Licensed in Alabama & Georgia with over a decade of mortgage lending experience.

Prospect Mortgage offers a full selection of mortgage programs including:
Conventional | FHA | FHA 580-639 FICO | FHA 203(k) Renovation (Streamline & Consultant) | HomePath® | HomePath® Renovation | HomeStyle® Renovation | VA | USDA | GA Dream | Jumbo Financing.
8 votes
Hi Rodney - You are correct in that I have posted several questions on the forum to gain a level-set understanding of various loan types, requirements, and overall process to be better prepared to ask the best questions to our lender of choice (based on our specific situation). We will be proceeding with our pre approval within the next few weeks but wanting to gain as much lending information(generic or otherwise) prior to taking the plunge is going to put my partner and I in a comfortable mindset.
Flag Tue Sep 3, 2013
Jay Orr, , Atlanta, GA
Tue Sep 3, 2013
Curtis:

Yes most lenders offer the FNMA 97%. The main variances are the Mortgage Insurance. FHA now charges 1.35% on a monthly schedule and it never goes away. FNMA(conventional) charges a factor that depends on LTV, credit score. Call me to go over in further detail.

Jay Orr
AVP, Mortgage Banker
LoanSouth Mortgage
404-226-3178
8 votes
Brian Brown, , Marietta, GA
Tue Sep 3, 2013
IF your credit scores are high enough, 97% Conventional will let you avoid the up front mortgage insurance that FHA requires AND, the monthly (which is slightly lower) will eventually go away - unlike the FHA which is there for the life of the loan.

I can't speak for everyone, but we offer it. You can even get someone to gift you 2% to go with your 3% down payment to be at 95% LTV and pay less monthly Mortgage Insurance.

Or, I even have product that is a 95% LTV Conventional and that 5% down is entirely a gift - no money of your own in transaction.

Let me know if I can help. We also offer the Homepath mentioned below (this option isn't always wise - it depends on your long term financial goals for the home).

You can reach me at 678-644-9912.
8 votes
Ava Anderson, Agent, Snellville, GA
Tue Sep 3, 2013
Hi Curtis,

The simple answer to your question is no all lenders do not all offer the same products. Most however will offer a Homepath Program which is a conventional product with 3% down and FHA with 3.5% down. I think the best thing for you do is contact a few lenders and allow them to explain the products they have and what the requirements would be for each product. Hope that helps and please let me know if you need a couple of lenders to contact.

Ava Anderson
Associate Broker
Solid Source Realty Inc
770 369-5121
8 votes
Chris Irvin, , Atlanta, GA
Tue Sep 3, 2013
Curtis,

There are 2 conventional loan options with 3% down, Flex 97 and Homepath. The Flex 97 loan is very similar to other conventional loans but the rate and the MI will be higher due to the added risk. The monthly MI payment will be very similar to FHA. The biggest difference between this and FHA is FHA also has a 1.75% up front mortgage insurance premium and the monthly premium will remain for the life of the loan. The Flex 97 MI will drop off at 78% loan to value ratio. The Homepath program is only available on Fannie Mae foreclosed properties deemed eligible. It allows for a 3% down payment, no MI, no appraisal required. The rate will be slightly higher than with 5% down. Both conventional options require higher credit scores than FHA for approval generally 680 or higher.

Chris Irvin
Mortgage Banker
Brand Mortgage
678-251-7889
http://www.chrisirvin.com
cirvin@brandmortgage.com
8 votes
Jeri Patrick, Agent, Pooler, GA
Wed Aug 5, 2015
I would speak to a lender to see what is the best loan options for you. Compare the loans. best of luck
7 votes
Prosper Real…, Agent, Tucson, AZ
Thu Aug 24, 2017
We always send our clients to Home Loans For All when they are looking for a lender. They have a good article they wrote about FHA loans vs Conventional loans. I'll include the link below.

Hope that helps!
2 votes
Densilucy, Both Buyer And Seller, Fremont, CA
Earlier today
The most common mortgage types for residential properties are an FHA loan and a Conventional loan.

Depending on the loan program, the required minimum down payment amount varies. For FHA loans it is 3.5% but keep in mind that with less than 20% down you'd have to pay "mortgage insurance".

The Fannie Mae conventional 97 loan program allows for home financing with just 3%. However, it may be difficult to secure the mandatory mortgage insurance if you have a low credit score.

USDA has ZERO down payment loan programs. To be eligibile, the property location must be in a designated rural zone.

Find out more about the low down payment mortgage programs.
Web Reference:  http://downpaymentguide.org
0 votes
, ,
Wed Jan 11, 2017
FHA requires 3.5% down and a minimum of a 580 credit score with some lenders. The Conventional loan program requires 3% down and a 620 credit score. An FHA mortgage loan officer will be able to help you decide on the best option for you.

http://www.fhamortgageprograms.com/georgia-fha-mortgage-lenders/
0 votes
, ,
Thu Jun 9, 2016
There are benefits to both FHA and Conventional loans. Conventional 3% down will have higher monthly mortgage mortgage insurance than FHA when you have a lower credit score but you can eventually drop it. FHA will have better interest rates across the boards but you can't drop the mortgage insurance unless you refinance. Feel free to visit my page or reach out for more details.
0 votes
Five Stars, Other Pro, Jacksonville, FL
Wed Jan 20, 2016
You will need a good credit score to get the required PMI for a 97% conventional loan. You can get the FHA loan with much lower credit scores. Also, the interest rate will be lower with the FHA loans.

Five Stars Mortgage
National Home Loan Resource
7 days week - 9am-8pm
Ph: 800-871-2636
http://www.FiveStarsMortgage.com
0 votes
FHA Mortgage…, , Jacksonville, FL
Thu Oct 8, 2015
The conventional option will require a funding fee ( 1.75% of the loan amount for FHA 3.5% down) However, the FHA option will allow for lower credit scores. It would be difficult to get a Conven loan with a credit score below 680.

FHA Mortgage Source
Florida & Georgia's Local FHA Loan Resource
Ph: 904-302-6060
http://www.FhaMortgageSource.com
0 votes
Megan Miller, Home Buyer, Fresno, CA
Mon Aug 31, 2015
Have you tried The Lenders Network? They helped me find a lender that approved our loan and my score was just 590. I highly recommend them. Hope this helps!
0 votes
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