FHA Loan VS Conventional Loan, Which is better? The question is always easier than the answer. Conventional mortgage rates are typically a bit higher than a comparable FHA Home Loan. This is due to the fact that the government is protecting the lender by insuring the loan which makes it easier for the lender to offer a lower rate to borrowers. If we look at the full picture though with the mortgage insurance that is required on FHA loans, this may or may not be the best loan product for you. To find the best loan product for you and the best rates available today, Click HERE!
Does FHA Loan or Conventional Loan Have A Lower Rate?
First you need to understand that your mortgage rate with either loan will be determined primarily by your FICO score, credit history, the amount of downpayment and the type and length of the mortgage loan that you are comparing. These factors have much more influence on the actual interest rate you will receive than if the loan is conventional or FHA.
What Is The Difference Between An FHA and Conventional Loan?
We will start with what the key differences are between an FHA loan and a Commercial loan. It is important for home buyers to understand the differences between these two mortgages. The differences can help you choose the right loan product for you to reach your goals.
The FHA loan product is a government loan that is insured through the Federal Housing Administration by the federal government. The FHA or Federal Housing Administration falls under the HUD, Housing and Urban Development. The FHA insurance is provided to the lender to protect them from borrower default.
The conventional home loan product does not receive any kind of government insurance or guarantee. This differentiates it from the VA loan program and the FHA loan programs.
Conventional home mortgage loans are loans originated with the private sector. In certain cases, a conventional mortgage may also require insurance that is similar to the FHA loan program. the difference is that the insurance policy itself is provided by an insurance company in the private sector, not a government agency. This is one important distinction between FHA and conventional home loans.
Does the FHA Loan or Conventional Home Loan Offer A Lower Rate?
In search of the lowest rate and wondering if an FHA loan or Conventional loan has a lower rate? The answer is that it depends on a lot of underwriting and credit factors. But when comparing fha loan vs conventional loan isn’t it all about the rate?
FHA home loans have a government guarantee which offers protection to the lender in the event of borrower default. This allows the lender in many cases to be able to provide a lower interest rate to the borrower than a conventional home loan.
There are many surveys that have shown that FHA loan borrowers do receive lower rates than the conventional mortgage borrowers. But the FHA guarantee is just one of many factors that affects the rate you will receive from your mortgage lender.
Here are some other underwriting factors:
- Your FICO or Credit score: The three scores provided by the major credit bureas (Equifax, Experian and Transunion). These three numbers serve to your lender as your indication of risk. Your mortgage lender will ask you to pull what is know as a tri merge report. This is a risk based score and different than your consumer score. The middle score of the three bureaus is your FICO score. If your score is higher than the borrower is perceived to be a lower risk and will typically receive a lower credit score. This holds true for both a conventional loan and the FHA loan.
- What are Discount points?: There is the opportunity when locking your interest rate to “buy down” your mortgage rate by paying what are known as discount points at closing. For example you might be offered to pay 1% of for every 100,000 in order to lower your interest rate 1%. This in affect is a form of prepaid interest. You are in essence paying a fee up front in exchange for receiving a lower rate of interest, which reduces your monthly payments for the term of the loan. Depending on how long you live in the home and have your mortgage, these discount points could end up saving you a substantial amount of money over time.
- Should I choose A Fixed or Adjustable Rate: The type of loan that you choose can greatly influence both the rate you receive and your monthly payment. Both a conventional and FHA mortgage loan are available in either fixed or adjustable rate type structures. Fixed home loans have higher mortgage rates due to the fact that lenders are taking a greater risk that rates will remain constant throughout the term of your loan. If you choose an adjustable-rate mortgage (ARM) they will typically have a lower interest rate during the very early part of your mortgage. The downside to an ARM is that after the initial term the rate can go up beyond what you may be able to afford. At the adjustment time market rates may also have gone up making it difficult to refinance. Keep these in mind when choosing your rate. You may opt for an ARM with a fixed rate for a 5, 7 or 10 year period if you do not expect to live in the home for the entire length of the mortgage.
The best way to find the best rate and term for your mortgage is to fill out the questionnaire here and a mortgage professional will call you with your free rate quote. You can also ask them to Pre-Qualify you so that you may start shopping for your home right away.
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