It’s quite surprising how many people that I speak to in the younger generation that believes the down payment requirement for a conventional home loan is 20%. Surprisingly they veer towards FHA financing for the simple reason that they have great credit and debt-to-income but don’t have a lot to put down on a home.
The actual down payment requirement for Conventional is only 3% however you have to meet certain parameters to qualify for that. Typically 5% down is the minimum required unless purchasing a home above 447,000. Then depending on the county you live in you may need to put 10% down if you go above that purchase price.
An educated loan officer should direct you in the best product to suit you and your long term goals. If you have a good credit score with no previous economic events preventing you from applying for conventional it may be the best direction to take. I typically will recommend or breakdown the difference if the FICO score is above 680.
The other big difference between an FHA loan and a Conventional loan is the mortgage insurance. The better the credit and higher the down payment on a conventional loan, the lower the mortgage insurance will be. FHA is the same way however the mortgage insurance is typically for the lifetime of the loan unless you opt for a 15 year fixed program. With conventional, you can eliminate the mortgage insurance ultimately making your payments more affordable in the long run. If we don’t see interest rates this low in the future, it’ll be in a nice position to have a low rate and no extra mortgage insurance.
The other unknown factor is whether or not mortgage insurance will be tax deductible in the future coming years. Of course, I can’t give tax advice as I am not an accountant, however, I believe it is able to be written off now and there isn’t an official end date as of yet when that will stop.
There are some cases where FHA may be more beneficial than conventional. In some areas, the FHA loan limit is higher than the conforming limit (not high balance) and will allow a lower down payment option than Conventional would. For example here in San Diego the FHA loan limit is 625,500. You only have to put down 3.5% as long as the purchase price is less than 648,000. These limits do vary between property types, in some cases, you may qualify for a higher loan limit for a duplex or triplex.
Ultimately you want to weigh out both options side by side and think of the long term. How long are you going to be living at the property, are you going to need to refinance at some point? These are things you want to think about and tell your mortgage consultant when applying for a home loan. This is the largest financial transaction in most everyone’s lifetime, working with the right seasoned professional is key.
I also cannot stress enough to get fully pre-approved before going home shopping. It may be a tedious process however you want to ensure you are qualified, you could lose out on hundreds if not thousands of dollars if your loan is for some odd reason denied. Don’t put yourself in that position, call us today to help.