First home mortgage FHA VS Conventional

My wife and I have the option of going fha or conventional. My question is will it be better to do 3% down fha or 5% conventional. Difference in down payment and closing is roughly $4100. My estimated monthly payment with fha is $2855 vs monthly with conventional being $2757. My loan officer said he will choose the conventional because our pmi is cheaper. He also stated that once we refinance we won’t owe the upfront pmi due to choosing a conventional loan vs the fha. He said we would would owe a little over $5000 to fha loan once refinanced to cover for the upfront pmi. Which will you pick and why? Thank you in advance.

In case it matters both loans are 5.99% for 30 years with $7000 builder contribution to closing.

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FHA charges a 1.75% funding fee that is there to help you get a better rate and mortgage insurance if you have low credit. If the rate and mortgage insurance are better or comparable with conventional, conventional is the way to go. It will save you thousands.

If the PMI is cheaper with Conventional, I would go with that one. You lose 1.75% of your equity when going with FHA due to their Upfront Mortgage Insurance charge that they roll into the loan amount. It puts you at a worse equity postion vs Conventional that does not have this charge.

@TomHenry Thank you for the feedback. This is what the loan officer said.

Conventional. More flexibility later down the road like refinancing or recasting. Easier to get approved as well.

If you can go conventional go conventional. Your MI stays on forever for FHA loans, however, on conventional your PMI will be removed once you hit the LTV requirements.

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Thank you for the feedback.

@BeckyThompson So the PMI will automatically remove?

Only if you go conventional. If you go FHA, no.

Our house is conventional, I plan to remove it, but my husband doesn’t want to remove the PMI

Go conventional. FHA is a rip off in the long run and for people who are not in the financial shape for homeownership in the first place. Trust me I had one many years ago and learned my lesson later. If you can swing it go conventional. :+1:

I appreciate you for sharing your personal experience. Thank you. Your advice has been taken.

One thing to consider is if rates end up going into the double digits which is very possible in the future, your 5.99% rate would be able to be taken over (assumed) by a buyer in the future when you sell. Conventional loans are not assumable. Many buyers are currently looking to purchase from sellers with 3% FHA mortgages to assume.

FHA rates are generally much lower than conventional. I’m surprised the rate and closing costs excluding the upfront MIP are the same.

In this case go with conventional. You can get rid of your monthly mortgage insurance after 2 years of payments once a new appraisal ordered from your loan servicer shows you have at 25% of equity or you pay your loan balance down to 75% of the appraised value.

At the same rate and same points, go with conventional. If they’re different rate/points structure, you should do the math on the fees/mortgage insurance. You should also weigh the likelihood of whether you’ll refinance or sell before the loan is paid off. Many people who go FHA choose it due to a lower rate and down payment, and then refinance to a conventional when rates are better and they have enough equity to avoid mortgage insurance.

@SimonGlen We ultimately decided to do conventional. We had to put down 1.5% more, but it saved us 100 bucks a month, and our pmi was lower, too. Thank you for your your insight.