If you’re looking to buy your first home, there are a number of things you need to know about a down payment and mortgage insurance. First, you’ll likely have to obtain a conventional or a Government loan like the Federal Housing Administration (FHA) mortgage, or a $0 down RD loan through the USDA. Let’s compare a Conventional loan with a FHA loan.
Conventional Mortgage
If you are putting between 5% and 20% down, you’re probably going to want a conventional mortgage. Credit Scores over 720 will generally earn you have a lower interest rate than lower credit scores.
Conventional mortgages generally require mortgage insurance or a higher interest rate on purchase transactions with less than 20% down.
FHA Mortgage
FHA mortgages require a minimum of 3.5% down and will allow you to have a credit score as low as 640. However, monthly mortgage insurance is always required, regardless of the amount of down payment and it is generally more expensive than the PMI required on a conventional mortgage.
What’s The Difference?
Being that the FHA is allowing lower credit scores, co-signers, and lower down payments than conventional mortgages are, there is more risk in lending the money. This risk is offset with the FHA mortgage insurance that is more expensive including up-front mortgage insurance that is typically financed into the amount you borrow.