If you ask a realtor this question, you might get mixed answers due to varying opinions and based on personal experience of the loan process associated with these two different loan products. If you ask a seller this question, you might get a flat "conventional" answer, no matter the market.
But, I'm not a realtor or a seller. So, my answer to this key question is very different. In fact, my answer is another question: Well, which loan option is best for the borrower and their particular needs in this current market?
That is also my first reply when someone asks me: Are Conventional loans "better" than FHA loans?
And, before I get too deep into"why" I ask this question, and which loan gets my stamp of approval in this current market, I want to first give a quick recap of what the difference is between these two mortgage loan types.
FHA versus Conventional loans: Let's Compare
Mortgages that are classified as "Conventional" are backed by the largest backers of mortgages in the United States of America. Most likely you've heard of them: Fannie Mae and Freddie Mac. They make the rules that govern these types of loans, and typically they require a minimum down payment of five percent (unless you're a first-time homebuyer or meet specific income restrictions based on the Florida county where you want to buy a home, or qualify for down payment assistance). If you qualify, you could put as little as three percent down, which is great. Also, if you put 20% down, then you are not required to have mortgage insurance as part of your house payment. Also a very good thing, because it means your house payment is lower. Last, but not least, the loan limit for Conventional loans is comparatively higher than FHA loans. For example, the 2024 loan limit for a single unit home is $766,550. This is an increase in 2024 compared to the 2023 limit of $726,200.
Key differences with FHA loans versus Conventional
An FHA loan is a mortgage product that is governed by the U.S. Department of Housing and Urban Development (HUD). In other words, they make the rules for this loan type. In case you're wondering (because I wonder about these things when I don't know them), FHA stands for the Federal Housing Administration (the branch of HUD that insures these types of mortgages). There are three key differences in regards to how FHA loans are governed: First off, there are no income restrictions for the minimum, low down payment option of 3.5% of the purchase price. That's a big deal for a lot of middle class Americans. Second, in most cases, mortgage insurance will be required for the life of the loan (unless you put more than 10% down and keep your mortgage for more than 10 years; MI drops off after 11 years). Third, the loan limits are comparatively lower than conventional loan options. The current loan limit for buying a single unit home with an FHA loan in Osceola County, Florida, for example, is $498,257. That means, if you want to buy a home for $525,000, then you would have to put more than 3.5% down in order to take advantage of an FHA loan.
On the surface, it seems like Conventional loans are superior to FHA loans (low down payment options, mortgage insurance that goes away after your loan-to-value reaches 80%, and higher loan limits). If these facts are all the Florida Mortgage Blog covers, then yes, we might come to this conclusion. But, we're not done yet. We haven't covered how these loans have been affected by the current housing market in Florida, and "why" I don't always recommend Conventional loans to every client.
How have these loans been affected by the current housing market?
In 2023, we all witnessed a rise in interest rates across the board for all mortgage loan types. Interestingly, however, throughout the year, we saw several "seasons" (periods of time measured in weeks, sometimes months), where interest rates were lower for FHA loans than Conventional loans. Now, since I'm in the business of mortgages, and many times a lower interest rate means a lower house payment, if that was the case for my client, I helped them weigh the pros and cons of FHA versus Conventional so they could make an informed and confident decision about which loan option was the best for their current needs.
Even more interestingly, and in more than one case, the monthly mortgage insurance payment (which is part of your monthly house payment if you are putting down less than 20%, regardless of the loan product) was actually significantly higher with Conventional financing compared to FHA. Here's one specific example:
A couple looking to buy a home in Central Florida at a purchase price of $410,000 wished to put down $20,000 using down payment assistance (which is just shy of 5% of the purchase price). The interest rate for these clients (based on credit score, the down payment assistance program, and other factors) was a quarter point lower on FHA compared to conventional. Furthermore, their estimated mortgage insurance payment with conventional financing would have been $312.86 higher per month. YIKES!
Why such a big difference in the monthly mortgage insurance payment? Well, because these particular clients made more than 80% of the Area Median Income (AMI) limit for the Florida county where they were purchasing their new home (which is not hard to do, by the way). For example, the AMI limit in Seminole County, Florida is a mere $68,560. So, FNMA says, "If you make more than $68,560 per year in Seminole County, Florida, and you want to put less than 20% down when you buy a home, then your mortgage insurance monthly payment will be calculated at a higher rate than someone who makes at or less than 80% of the AMI limit."
I'm sure you can imagine, after I reviewed this with my clients, they determined an FHA loan was best for them.
So, my short answer to which loan option is better in the current market is: it depends.
I am here to consult with clients about which loan option is best for them based on their needs and, many times, the best loan option is the one that offers the lowest, most affordable house payment.
Ultimately, I help them weigh the pros and cons of each loan product so they can make a confident decision about the best home financing solution for them.
And, perhaps, the most important question to close out with is: Does your bank do that for you?
If you're not sure, then let's chat. It would be my pleasure to consult with you about your needs, and help you make an informed decision about the financing for your new home in Florida.
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