This guide covers FHA versus conventional mortgage rates on purchase and refinances transactions. One of the most common questions the team at Gustan Cho Associates is how are FHA versus Conventional mortgage rates. Not all borrowers get the same mortgage rates.

Prime borrowers will get the best mortgage rates and terms. Prime borrowers have at least a 740 credit score and a 20% down payment. However, all lenders have pricing hits which are called loan-level pricing adjustments. Loan-level pricing adjustments are also referred to as LLPAs or pricing adjustments.

Lenders will charge pricing hits on riskier borrowers. One of the major factors that determine risk by lenders is the borrower’s credit score. The lower the borrower’s credit score, the higher the risk. Borrowers with lower credit scores will get higher mortgage rates and possibly be charged discount points. In the following paragraphs, we will discuss FHA versus conventional mortgage rates.

Better Rates FHA Versus Conventional Mortgage Rates Due To Government Guarantee

Conventional loans are more credit score sensitive when it comes to mortgage rates. This is because conventional loans are not guaranteed or insured by a federal agency like FHA loans are. HUD insures FHA loans.

HUD is the parent of FHA. FHA will insure lenders against loss if the borrowers default on their FHA loans. Due to the government guarantee by HUD, mortgage rates on FHA loans are generally lower than on conforming loans. FHA loans have no loan-level pricing adjustments on loan-to-value (LTV).

Again, the reason FHA loans do not have LLPAs on LTV is due to the guarantee by HUD. However, it is mandatory for all 30-year fixed-rate FHA loans to have an annual FHA MIP of 0.55% for the term of the loan. This article will discuss and cover FHA Versus Conventional mortgage rates on purchase and refinance.

Why Are FHA Loans Very Popular

FHA loans are one of the most popular loan programs in the United States. HUD, the parent of FHA, sets the minimum federal agency mortgage guidelines on FHA loans. Over 40% of all homebuyers use FHA loans to finance their homes. One of the most popular reasons home buyers choose FHA versus Conventional loans is because FHA loans have much lenient mortgage guidelines versus conventional loans. Borrowers can qualify for FHA loans with credit scores as low as 500 FICO.

To qualify for a 3.5% down payment FHA loan, the borrower must have a 580 credit score. Borrowers under 580 FICO and down to 500 credit scores can qualify for FHA loans but need a 10% down payment. The minimum credit score requirements on conventional loans are 620 FICO. 620 credit score is considered very bad on conventional loans.

Borrowers with a 620 FICO will get quoted a very high mortgage rate plus discount points. On FHA loans, a 620 credit score is not bad. Borrowers with a 620 credit score will get par rates and will likely not be charged discount points. FHA has higher debt-to-income ratio caps versus conventional loans. Borrowers can have a back-end debt-to-income ratio of 56.9% DTI on FHA loans. Conventional loans will cap debt to income ratio at 50% to get an approve/eligible per automated underwriting system (AUS).

Comparison of FHA Versus Conventional Mortgage Rates

Borrowers under 700 credit scores will benefit from FHA versus conventional mortgage rates. As mentioned earlier,  Conventional mortgage rates are more sensitive to credit scores. In general, FHA mortgage rates are about 0.25% to 0.50% lower than conventional rates due to the government guarantee by HUD.

One of the disadvantages of FHA loans is FHA mortgage insurance premium is mandatory on all 30-year fixed-rate FHA loans. This holds true no matter how much the loan to value is. You cannot opt out of the annual FHA MIP on FHA loans. No matter how low the loan to value, FHA MIP is required for the term of the 30-year fixed-rate mortgage.

You cannot cancel the FHA MIP. Conventional Loans require no private mortgage insurance if the borrower has 20% equity. Borrowers who do not have a 20% down payment when purchasing a home with a conventional loan can cancel the private mortgage insurance once they have an 80% LTV. This can be done sooner than later in an appreciating housing market.

Monthly Housing Payment With Mortgage Insurance

When shopping for a mortgage, I highly recommend choosing a loan program that best suits your needs. Comparing mortgage rates is important. However, what loan program saves you the most money? Just getting the best mortgage rates is not everything.

Consider the overall monthly housing payments when comparing FHA Versus Conventional mortgage rates. Private mortgage insurance is normally cheaper than the FHA mortgage insurance premium.

Compare and contrast the overall monthly housing payments, including mortgage insurance. Also, look at the pros and cons of FHA versus Conventional mortgage insurance. Remember that you cannot cancel the FHA mortgage insurance premium on 30-year fixed-rate mortgages. This holds true no matter how low your LTV is. On Conventional loans, you can cancel the private mortgage insurance once you reach an 80% loan to value. Your loan officer can do a cost analysis on the benefits and pros and cons of FHA versus conventional mortgage rates.