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It is not uncommon for FHA to offer lower interest rates than conventional loans. – Score 1 for FHA
FHA require 3.5% down while Conventional Loans require 5% or more down
Here is where conventional loans start to gain speed. Most FHA borrowers are using this program to take advantage of the small down payment requirement. If you put 3.5% down on an FHA loan your mortgage insurance factor is 1.35% of your loan amount. Additionally, you will pay this monthly mortgage insurance for the life of the loan…..IT NEVER GOES AWAY. Not to mention you also have to pay an upfront mortgage insurance premium (1.75%) to FHA for the privilege of having an FHA Loan. This can be rolled back into the loan but it can be thousands of dollars in addition to the amount you were planning to borrow.
The mortgage insurance factor on Conventional Loans varies depending on your credit score. With strong credit the mortgage insurance factor could be .54% or less than half that of an FHA loan. Not to mention there is no upfront mortgage insurance premium required on a conventional loan. This makes a big difference when it comes to monthly payment.
FHA is more credit lenient. If a borrower has a low credit score 640 or less FHA may be the way to go. Inversely a conventional loan is much cheaper if the borrower has excellent credit 740 or better.