The FHA is insuring a greater percentage of loans than during any time in recent history. In 2006, it insured roughly 5 percent of the purchase mortgage market. Today, it insures one-quarter. “Going FHA” is more common than ever before — but is it better?
The answer — like most things in mortgage — depends on your circumstance.
Like its conforming counterpart, an FHA-insured mortgage is available as a fixed-rate loan and as an adjustable-rate one. Payments are made monthly and come without prepayment penalties. That’s where the similarities end, however, and decision-making begins.
For homeowners and buyers, FHA mortgages carry a different set of rules as compared to conforming loans through Fannie Mae or Freddie Mac that can render them more — or less — attractive for financing.
For example:
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FHA mortgages can be assumed by a subsequent buyer. Conforming loans may not.
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FHA mortgages require mortgage insurance, regardless of downpayment. Conforming loans do not.
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FHA mortgages do not have loan-level pricing adjustment. Conforming loans do.
FHA mortgages also require smaller downpayment requirements versus a comparable conforming mortgage. FHA calls for a minimum downpayment of 3.5%. Conforming mortgages often require 5% or more.
And lastly, FHA mortgages are priced differently from conforming ones. Since 2005, the average FHA mortgage rate has been below the average conforming mortgage rate more than 50% of the time, meaning that an FHA mortgage’s principal + interest payment is lower than a comparable Fannie/Freddie loan.
Today, conforming mortgage rates are lower.
So, Which Is Better — FHA Loans or Conforming Ones?
Like most things in mortgage, it depends. FHA-insured loans can be big money-savers or money-wasters. To find out which is best for you, ask your loan officer for today’s market interest rates and study the results.
With less than 20% equity, the answer is often clear.
