FHA insurance versus private mortgage insurance

by Gina Pogol
December 2nd, 2010

For those buying a home with less than 20% down, or refinancing with little equity, FHA mortgage insurance versus private mortgage insurance becomes a real issue. Here are some of the differences.

Credit score minimum for purchase with less than 5% down:

Private mortgage insurance: 720
FHA insurance: 580 (but more likely 620 – 640 with lender overlays)

Credit score minimum for purchase with down payment of 5% or more:

Private mortgage insurance: 660
FHA insurance: 580 (but more likely 620 – 640 with lender overlays)

Minimum credit score for cash-out refinance to 85%:

Private mortgage insurance: 700
FHA: FHA insurance: 580 (but more likely 620 – 640 with lender overlays)

Purchases or refinances in Florida:

Private mortgage insurance: Add 20 points to minimum credit score
FHA: No additional requirement

Maximum loan amount:

Private mortgage insurance: ranges from  $417,000 to $625,500 for one unit
FHA: Ranges from $271,050 to $729,750 for one unit

Maximum cash out:

Private mortgage insurance: to 85%
FHA: to 85%

Non-traditional credit:

Private mortgage insurance: max of 95% LTV and max of 41% debt-to-income ratio
FHA: No restrictions

Seller contributions:

Private mortgage insurance: Max of 3% if LTV is greater than 90%, max of 6% if LTV is 90% or lower
FHA: Max of 3% in all cases

Property types:

Private mortgage insurance: condos and coops limited to a max of 95%, manufactured housing to 85%, and 3-4 unit properties are not allowed.
FHA: No restrictions on approved condos, manufactured homes or multi-unit properties.

Second homes:

Private mortgage insurance: 90% LTV or lower okay
FHA: Does not insure second homes.

Investor property:

Private mortgage insurance: not available
FHA: Does not insure investor property

So if your credit scores are south of 700 and you have a small down payment, if you are shopping in a high-cost area where FHA has the highest loan limits,  or if you’re buying in Florida or want a manufactured home, FHA’s less restrictive guidelines may make it your best choice. If you have a seller willing to make large contributions to your closing costs or want a second home, conventional private mortgage insurance may be a better fit. But check into both options before making a decision — just letting a lender decide for you might not be in your best interest.

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