This article provides an overview of the key differences between conventional and FHA mortgage loans for Washington home buyers, and has been fully updated for 2018.
Conventional vs. FHA Loans in Washington
As a home buyer and borrower, you have a lot of choices when it comes to your mortgage financing. One of the primary choices is whether to use a conventional or FHA loan to buy a house in Washington.
- A Federal Housing Administration (FHA) home loan is originated within the private sector but insured by the federal government. The program is managed by HUD.
- A conventional loan is originated in the private sector and (sometimes) insured by private-sector insurance companies. There is no government backing or guarantee.
If you can afford to put down 20% or more when buying a house, it’s an easier choice to make. A conventional mortgage loan with a down payment of 20% or more will allow the borrower to avoid private mortgage insurance, which can reduce the overall cost of the loan.
But if you don’t have a lot of money saved up for a down payment — and you’re looking for a mortgage loan with a low upfront investment — the choice between FHA and conventional home loans is less clear. And that’s the audience we are addressing today.
Mortgage Insurance Differences: PMI versus MIP
If you make a relatively small down payment when buying a house in Washington, you will most likely have to pay for a mortgage insurance policy. This is true for both FHA and conventional home loans.
Here’s how they are different:
FHA loan insurance (MIP) — Nearly all borrowers who use an FHA loan to buy a house have to pay mortgage insurance premiums, or MIPs. The upfront MIP is usually 1.75% of the loan amount. The annual premium for most FHA borrowers is 0.85%, assuming a 30-year mortgage with 3.5% down. The typical FHA home buyer has to pay the annual mortgage insurance for the life of the loan. This is a key distinction from conventional mortgage financing, covered below.
Conventional loan insurance (PMI) — Borrowers who use a conventional (non-government-backed) mortgage loan in Washington with a small down payment usually have to pay for private mortgage insurance, or PMI. Annual PMI premiums typically range from 0.3% to about 1.5% of the original loan amount. The difference here is that PMI can be canceled at a later date, in most cases, when the homeowner has at least 20% equity in the home.
The cost of insurance is another important factor. In many cases, the PMI assigned to a conventional home loan in Washington ends up being lower than the mortgage insurance required for an FHA home loan. But the qualification criteria for borrowers can be a bit more lenient with an FHA loan.
So both of these programs have an ideal audience. The key is to figure out which one is a good fit for you, based on your financing goals and priorities.
Higher Loan Limits for 2018
In closing, home buyers in Washington should know that loan limits were increased for 2018. This is true for both FHA and conventional mortgage loans. Federal housing officials raised these limits in response to significant home-price gains that occurred during 2017.
FHA loan limits in Washington range from $294,515 up to $667,000. They vary by county because they are based on median home prices.
Conventional loan limits in Washington State start at a baseline of $453,100 and rise to a high of $667,000 in the higher-priced Seattle area.