What is the difference between FHA and Conventional Mortgages?
FHA Financing VS Conventional (Please click on links below for elaborated information)
FHA is a government loan…FHA stands for Federal Housing Administration. As of the day I’m writing this post, July 2014, the minimum down payment on the more traditional FHA financing options is 3.5%. FHA mortgages have 2 types of mortgage insurance, Up Front Mortgage Insurance, which is rolled into the loan, and annual mortgage insurance, which you pay in your monthly payment…better known as MIP or Mortgage Insurance Premium. Conventional mortgage insurance is called PMI…Private Mortgage Insurance. FHA mortgage insurance facts…ie MIP FACTS!!!
#1 Reason People Use FHA Financing– The main reason most home buyers in America use FHA is because they are looking for the smallest down payment, or least out-of-pocket loan option when purchasing a home. In MOST cases, conventional financing will require you to put down at least 5% down payment.
FHA is typically used with first time home buyers. Another reason many buyers use FHA is because it allows for the seller to pay more of the closing costs. With FHA, you can have the seller pay 6% and on conventional, only 3%. Facts about calculating seller paid closing costs or also seller contribution. See all of my previous posts about FHA mortgages.
Conventional lending only has one type of mortgage insurance, and it’s called PMI…Private Mortgage Insurance. To avoid paying mortgage insurance when using conventional lending, you simply need to make sure you have a primary loan that is no more than 80% of the purchase price on purchase transactions, or on refinance, appraised value. You can still borrower a total amount higher than 80% and avoid PMI by taking out a 1st lien of 80% loan to value, and a 2nd lien of 15% loan to value…this example is on a 5% down payment option. Further explanation of combo loan structure to avoid PMI was explained further at www.yourmortgageguyforlife.com like this:
Avoiding PMI by Using 2ndary Financing
If you only want to put down 5%, 10%, or 15% toward you purchase, you can avoid paying Mortgage Insurance by securing a 2nd lien on the property. For example, if you wanted to put down only 10%, you could look at getting 1st lien that is 80% of the purchase price of your house, and then a 2nd lien that is 10% of the purchase of the house. This is a combo loan that is often called an 80/10/10 (80% 1st lien, 10% 2nd lien, and 10% down payment). The only other way to avoid paying a monthly PMI is to choose the lender paid option. In the lender paid PMI option, the interest rate is just slightly higher (usually by only .25%-.375%), but for those folks with the primary goal being the lowest monthly payment possible, the increase in rate delivers a monthly payment that is lower than the option where the rate is lower but you also have to pay the monthly PMI.