The Best Mortgage for You: FHA or Conventional?

The Federal Housing Administration (FHA) is insuring a greater percentage of loans than during any time in recent history. In 2006, it insured roughly five percent of the purchase mortgage market, but today, 35 percent of millennials choose an FHA mortgage. "Going FHA" is more common than ever before... but is it better?

In short, it depends on your situation. Like it's conforming counterpart, an FHA-insured mortgage is available as a fixed-rate loan and as an adjustable-rate one, and payments for either loan type are made monthly and come without prepayment penalties. However, FHA mortgages carry a different set rules that can render them more attractive to young buyers for financing as opposed to a conventional mortgage.

What's the difference between FHA and Conventional?

• FHA mortgages can be assumed by the next homebuyer, meaning that if you buy a home from someone who has an FHA mortgage, they can "pass on" the loan to you, provided you qualify. The benefit of this practice is that you receive the interest rate of the original loan, which could be significantly lower than the current market rate. Conventional loans do not have this feature.
• FHA mortgages require mortgage insurance, regardless of down payment. Conventional loans don't require mortgage insurance if you put a 20% down payment.
• FHA mortgages do not have loan-level pricing adjustment, meaning that they're not subject to additional fees that depend on the risk characteristics of the borrower. Conventional loans do have this feature.

Benefits of an FHA Mortgage

• FHA mortgages have less stringent credit requirements than a conventional mortgage. If you have less than perfect credit, you may be approved for an FHA loan when you would not be approved under a conventional mortgage product.
• Since 2005, the average FHA mortgage rate has been below the average conforming mortgage rate more than half of the time, meaning that an FHA mortgage's principal + interest payment is lower than a comparable conventional loan.
• FHA loans will typically have a lower base interest rate than comparable conventional loans.

Bottom Line:

While both FHA and Conventional loans offer low down payment options, conventional loans do not require mortgage insurance for the life of the loan, whereas FHA loans do. On the other hand, FHA loans are assumable, so if you can find a property with an FHA loan at a competitive rate, you could potentially enjoy savings each month on your mortgage. The first step to determining which of these loan types is best for you is to connect with a mortgage banker to assess your credit history and determine if you qualify for both loan types.