Should We Use FHA or Conventional If We Are Approved for Both?

In the past, we have lost offers because other sellers went with a conventional loan instead of our FHA (confirmed by our realtor). However, when getting quotes, it is clear that the FHA interest rate is way lower than the conventional. What should we do going forward in a competitive market?

Are you at 20% down payment? Because if lower, the FHA mortgage insurance is usually more expensive than a conventional loan’s PMI. The FHA’s MIP stays on the loan longer (11 years if > 10% down payment, forever if < 10% down payment.)

@Hutton
Oh yeah, that makes sense. We would only be putting around 10% down.

Sky said:
@Hutton
Oh yeah, that makes sense. We would only be putting around 10% down.

Yeah, make sure you’re at least 10% down, and then crunch the numbers with the rates and exact PMI vs MIP numbers.

Interest rate isn’t everything. You’re paying an upfront mortgage insurance premium with FHA of an extra 1.75% financed into your loan AND the monthly MIP is likely more (unless you have lower credit). You also can never remove the MIP unless you’re putting 10% down, and even then it takes 11 years.

@Teagan
The plan is to put around 10% down.

Sky said:
@Teagan
The plan is to put around 10% down.

If you have good credit, then conventional is likely the better option as the mortgage insurance will likely be cheaper.

How long ago was the past? What market? I’m in AZ, and while we don’t have a lot of inventory, there are three houses for sale in my neighborhood. They’ve been on the market for three months. I wouldn’t care which type of loan you had.

With a decent credit score, FHA rates are about the same as conventional. FHA has a pay-to-play charge of 1.75% (UFMIP), so an apples-to-apples comparison would be to look at conventional with 1.75 points.

Example:
0 points FHA 6.25% plus MMI of 0.55% is an effective rate of 6.8%.
Conventional 1.75 points at 6.5% plus PMI of 0.34% is an effective rate of 6.84%.

(not actual rates, YMMV)

@Kit
Wow, thank you for breaking this down for me. We were quoted at an FHA rate of 6.125 and a conventional rate of 6.75.

Make sure you can get rid of the PMI later and also if you can recast your mortgage balance. I have an FHA and can’t do either.