If you’re a first-time homebuyer (or even if you’re not), it may come as a bit of a shock to learn just how many mortgage options are out there.
Unless you have served in the military and qualify for a VA loan, or are buying in a rural area and can go with a USDA loan, odds are good that you’re going to find yourself choosing between an FHA or a conventional loan.
Of course, recent changes to both FHA and conventional mortgages mean the decision can be even harder. In December, Fannie Mae and Freddie Mac announced that they’ll start backing fixed-rate loans with as little as 3% down, and in January, the President announced a 0.5% cut to FHA mortgage insurance premiums.
So how do you choose? Here’s the breakdown:
|-Down payments as low as 3.5%
-500 minimum credit score.
-Available to buyers 3 years after a foreclosure or 2 years after a bankruptcy.
-Mortgage insurance required on all loans (recent changes lowered the rate).
-Mortgage insurance required for the life of the loan.
-Eligible for a Streamline refinance.
-Not available for investment or second properties.
-Limited to a few standard loan programs
|-Down payments as low as 3% (thanks to new changes)
-620 minimum credit score.
-Available to buyers 7 years after a foreclosure or 4 years after a bankruptcy.
-Mortgage insurance required only for loans exceeding an 80% loan-to-value ratio.
-Mortgage insurance will end once you reach 78% loan-to-value ratio.
-Standard refinance required
-Available for all residential properties.
-More loan program options
So which is more cost efficient?
That’s going to depend on a host of factors—your credit score, your down payment amount, how long you plan to stay with the mortgage, and so on.
I can tell you that FHA loans do sometimes have slightly lower interest rates than conventional fixed-rate, but that comes at a price—namely, mortgage insurance premiums. The recent cut of 0.5% is significant (some estimate it will save homeowners about $900 a year), but remember that you’re still stuck with mortgage insurance for the life of your loan.
The biggest advantage to an FHA? The lower credit requirements.
Oh the other hand, if the only reason you were considering an FHA is because of the lower down payment requirement, a conventional fixed rate loan is now pretty much a no brainer. You can put a minimum amount down and you’re only stuck paying mortgage insurance for a set amount of time.