Why FHA Loans Are Now More Expensive (And Why You May Still Want One)

Picture it: you’re picking between two new shiny objects. One has higher up-front costs and higher monthly payments, while the other has no up-front costs, and lower monthly payments. All other things being equal, after weighing the pros and cons, you choose the higher priced option! That’s crazy talk, you say! No one would ever do that!

This metaphor is a great parallel for the two most popular home loans: conventional and FHA. Conventional loans are generally cheaper than FHA loans. They require no up-front mortgage insurance premiums, and have low down payments, down to as little as 3 percent of the purchase price. FHA loans, in contrast, are more expensive to get. They require an up-front mortgage insurance fee of 0.175% on all loans over 80 percent, and have monthly mortgage insurance that stays with you for the life of the loan. Yet, in recent years, FHA popularity has surged. (To give you an idea, they went from a 3 percent market share to almost 33 percent.) Here’s why, even though FHA loans are more expensive, you still might want one.

Reason #1: Credit

The two main reasons why you still may get an FHA loan over a conventional loan are if you’re a credit-challenged borrower or if you need a lower down payment option. An FHA loan is easier to get if you are a credit-challenged borrower. They’ll loan to borrowers with lower credit scores, down to 600 credit scores in some cases. Conventional loans generally require at least a 700 credit score. Additionally conventional loans written using Fannie Mae guidelines (the largest conventional mortgage purchaser) now include monthly payments on collection debts in your debt-to-income calculation.

Reason #2: Collateral

The second reason an FHA loan may still be the way to go is if you need a lower down payment option. While you used to be able to get a conventional loan with as little as 3 percent down, Fannie Mae now requires a minimum down payment of 5 percent, making FHA’s 3.5 the winner in the low down payment category.

So, even though FHA loans are generally more expensive to get due to their up-front MIP and their monthly MIP that never goes away, if you’re a credit-challenged borrower, or need the lowest down payment possible, the FHA loan may still be the loan for you. There are, of course, other conventional loan options, so you should definitely talk to your mortgage professional before making any final decisions.

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