Can Conventional loan be more affordable than FHA loans?

If you’re ready to purchase a home, choosing the right mortgage is one of the most important decisions you’ll make. While the Federal Housing Authority’s FHA loan is often recognized as a good choice for first-time homebuyers on a budget due to lenient requirements like low credit minimums, Conventional loans also offer affordability, flexibility and long-term savings. Plus, compatibility with down payment assistance (DPA) programs and the potential to avoid mortgage insurance add to the reasons why a Conventional loan could be a better solution than an FHA loan depending on your situation.

Pop quiz: Which program requires a lower minimum down payment? If you answered FHA you would be wrong. There’s a common misconception that a 20% down payment is required for Conventional loans. With the median home price around $400,000, that would mean saving a whopping $80,000 upfront. However, the reality is Conventional loans now offer programs with down payments as low as 3%, making them competitive with FHA loans which have a 3.5% down payment minimum. Use Guild’s mortgage payment calculator to see how down payment rates can impact your monthly payments.

Down payment assistance (DPA) programs can be a game-changer for first-time homebuyers. These programs provide financial support to cover upfront costs like down payments and closing fees, significantly reducing the borrower’s initial expenses. While many DPA programs are offered by state housing authorities, they don’t always need to be leveraged with a government loan. Many Conventional loans qualify as well.

Responding to market demands, Guild has introduced several flexible Conventional loan programs that cater to a wide range of borrowers. They have features and benefits that rival those of FHA loans, offering you greater choices and affordability.

Freddie Mac BorrowSmart(tm)*: This program provides assistance up to $1,000 for income-qualified borrowers to be used towards a down payment or closing costs. BorrowSmart may be combined with other DPAs to provide maximum support.

Payment Advantage program**: You may be able to lower your monthly payments for the first year of your mortgage with this temporary buydown program, making it more affordable to buy now.

Fannie Mae HomeReady First***: This first-time homebuyer program may provide $5,000 from Fannie Mae and an additional $1,500 from Guild Mortgage to help make the dream of homeownership possible in select locations. HomeReady First has no area median income limits based on where you currently live as well as up to a $500 credit at closing towards appraisal costs.

Guild Gateway to Homeownership****: This assistance program helps homebuyers in select areas achieve homeownership with more affordable monthly payments. If you qualify, you may receive up to $5,000 to use for closing costs, lowering your interest rate, or paying mortgage insurance. It can be paired with additional local DPAs.

Mortgage insurance is an insurance policy that protects the lender if you can’t make your mortgage payments. For FHA loans, a mortgage insurance premium (MIP) is mandatory for the life of your loan, no matter how much you put down, adding to your homeownership expenses. In contrast, Conventional loans offer more flexibility around mortgage insurance. While private mortgage insurance (PMI) is typically required for a Conventional loan with less than a 20% down payment, the PMI rate may vary and it may be removed entirely after enough equity is earned in the home. Notably, if your down payment is 20% or more, PMI is not required at all.

In the ever-changing world of mortgage lending, Conventional loans can be an attractive alternative to FHA loans. With lower upfront fees, evolving guidelines and innovative programs tailored to diverse needs, Conventional loans may provide borrowers with greater flexibility and affordability. When you’re ready to explore your options, Connect with a local loan officer to help find the loan that best fits your needs.