A common question home buyers in California ask me is if an FHA loan is better than a Conventional loan. The increase in popularity between the two loan programs may be an indicator as to which is better. FHA now insures 25% of all home mortgage loans in the United States, which is the highest percentage in recent history. In 2006, it insured just 5 percent of the purchase mortgage loans.
My unofficial estimate for the Inland Empire is that 60%-70% of all home purchases are financed using an FHA mortgage. OK, so FHA loans are more common now than ever before — but is it better?
The answer, like most things in mortgage, depends on your circumstance.
Like its Conventional counterpart, an FHA-insured mortgage is available as a 30 year fixed-rate loan or an adjustable-rate one. Payments are made monthly and come without prepayment penalties.
That’s where the similarities end, however, and decision-making begins. It’s important to compare apples to apples. For homeowners and buyers across the Inland Empire cities of Temecula, Murrieta , Menifee, Corona, Riverside and Moreno Valley, FHA mortgages carry a different set rules as compared to Conventional conforming loans secured and underwritten according to Fannie Mae or Freddie Mac guidelines that can render them more, or less, attractive for financing.
- FHA mortgages require a one time upfront and monthly mortgage insurance fee, regardless of down payment. Conventional loans do not(if you have a 20% down payment)
- FHA mortgages do not have loan-level pricing adjustment. Conventional loans do.
- FHA Mortgages underwriting guidelines tend to be less restrictive and more forgiving with credit history’s than Conventional underwriting guidelines.
FHA mortgages also require smaller downpayment requirements versus a comparable conventional mortgage. FHA requires a minimum 3.5% down payment. Conventional financing often requires 5 percent or more.
And, lastly, FHA mortgages are priced differently from Conventional ones. Since 2005, the average FHA mortgage rate has been below the average conforming mortgage rate more than 50% of the time, meaning that an FHA mortgage’s principal + interest payment is lower than a comparable Fannie/Freddie loan.
Today, FHA rates are lower.
So, which is better — FHA loans or Conventional financing? Like most things in mortgage, it depends. FHA-insured loans can save you a lot of money by avoiding a large down payment and still provide a low rate and payment.
To find out which is best for you, call me at (951) 215-6119 to discuss all your home financing options and we’ll do a side by side comparison to determine which loan program provides the lowest payment, lowest down payment, lowest fees, or all three!
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