Conventional mortgage can save cash

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Home mortgage borrowers with good credit and the funds for a larger down payment may be better served by a conventional loan than an FHA-insured loan.

FHA-insured loans are enticing because they have low down payment requirements. But conventional loans also have advantages.

“The main advantage of a conventional loan is that the borrower can avoid paying the upfront mortgage insurance and possibly the monthly mortgage insurance of an FHA loan,” says Sarah Pichardo, a senior loan officer with George Mason Mortgage in Fairfax, Va.

On April 5, 2010, the rate for the upfront mortgage insurance required by FHA went up to 2.25 percent of the loan amount, regardless of the size of the down payment.

By contrast, conventional mortgage loans do not require private mortgage insurance for a borrower putting down 20 percent or more. 

“If a borrower makes a down payment of less than 20 percent on a conventional loan, the rates of mortgage insurance vary according to credit scores, debt-to-income ratio, the type of mortgage insurance a borrower chooses, as well as the loan-to-value ratio,” Pichardo says.

FHA borrowers can petition to have their mortgage insurance eliminated after a five-year history of on-time payments. With a conventional mortgage, borrowers can petition to have their mortgage insurance eliminated after two years of on-time payments. In both cases, the loan-to-value ratio must be less than 78 percent.

FHA-insured loans allow consumers with lower credit scores, a smaller down payment and higher debt-to-income ratios to qualify for a mortgage. But the costs of borrowing through this program are typically higher than the costs of financing a home purchase with a conventional mortgage.