What are the differences between FHA and a Conforming loan…short and sweet version.

Many of you have probably heard a lot over the last year about this amazing new loan called FHA. Many more might be asking. “Ok, so what is this FHA loan? How is it different from other loans? And how does it benefit me?”

This will just be a short and sweet version on the differences, just to give you, the consumer, the basic knowledge on the differences…and which loan might better suit your needs.

Many are people are familiar with conforming loans. A loan designed for well qualified borrowers. This loan as a rule of thumb wants you to have 20% equity in the property. However, you can have less equity but you are going to pay for it with private mortgage insurance (PMI). Now there are different types of PMI…but for simplistic sake I am just explaining the Borrowers paid PMI (BPMI). BPMI is an insurance policy that you pay as the borrower to insure the lender against your possible default. Basically, an added monthly cost since you do not have the full 20% in equity. The conventional loan is typically your cheapest option when you have a full 20% in equity.

Then we have FHA, this loan was originally designed for low to moderate income earners, that have a decent credit history, but very little in the way of savings or equity. FHA as of October 1st, will require you to have 3.5% for a down payment. However, not only do you have the monthly mortgage insurance, you also have a upfront mortgage insurance premium (UFMIP). In most cases on October 1st, your UFMIP will be 1.75% of you loan amount. So, if you borrow $100,000 you would have a premium of $1,750. This does not have to be paid upfront, however financing it into the loan has its own costs you must consider.

So which option is good for you? There are a few things to take into consideration.

1. If you have limited equity or a small down payment (FHA in many cases is your only option)

2. If you have 5% or more down, then you may have to weigh the costs of each. Don’t just assume one lender is right if they are pushing one over the other, without giving you the details on both. Take your time, weigh the total costs, interest rate, and your total monthly payment. Depending on your credit score and amount of equity, conforming could either be fairly cheap, or really expensive. Especially when you put the interest rate and mortgage insurance together.

3. If you have 20% or more down or in equity, at that point you can really throw FHA out the window. Conforming at that point will not have the mortgage insurance costs, while FHA still will.

So, if you fall in that middle ground, take your time, and make sure you have all your options laid out in front of you before you make a decision.