If you are thinking of purchaing a home with the next twelve months, consider talking with a loan officer prior to your home search to make sure you know how much you can afford and where you are comfortable with monthly payments. Craig Anderson of Rivercity Mortagage provided me with this helpful insight on loan programs and comparing FHA and Conventional loans.
FHA is increasing it’s monthly mortgage insurance premiums in April so it is time to compare both mortgages to see what works for your own situation.
Credit. If you have a good credit score (ideally over 740), a conventional loan may make more sense than an FHA loan due to the fact that the monthly mortgage insurance premium will probably be lower than FHAs. If your credit score is under 700, especially under 660, it will probably make more sense to go with an FHA loan as both the mortgage rate and availability of mortgage insurance for the conventional option will make the FHA option more affordable.
Income. For a conventional loan, the limit on debt to income ratios is 45% and ideally 41%. For an FHA loan, you can have higher debt to income ratios – usually a maximum of 50%. Both options are going to require that the income be deemed stable and likely to continue.
Down payment and reserves. A conventionally insured loan will allow for a slightly smaller down payment, but is going to typically require that the borrower have at least two months worth of housing payments in reserves after closing. An FHA loan will allow for a higher percentage of contribution from the seller to help pay the borrower’s closing costs and pre-paid items which may come into play on a smaller purchase price.
Interest Rate. The interest rate on FHA loans tends to be lower than that of a conventional loan, however FHA requires that the borrower pay a 1% funding fee that can be financed into the mortgage. Often this addition to the loan amount will offset the monthly savings that the lower interest rate produces.
If you know you have good credit and you have the ability to make a down payment of at least 5%, you may want to ask your loan officer about using a conventional mortgage instead of FHA.
To contact Craig Anderson you can reach him at the office 952-908-3420 or on his cell phone 612-964-6620. Otherwise you can email him with questions or to get preapproved canderson@RiverCityMortgage.com
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