Nevada: FHA or Conventional With 5% Down & a 640 Score?

FHA vs. Conventional: The Nevada Homebuyer's Dilemma

You've saved 5% for a down payment on a home in Nevada and your credit score is hovering around 640. You're ready to buy, but lenders seem to be steering you exclusively toward an FHA loan. While a Conventional loan might seem out of reach, it's crucial to understand the mechanics of both options. This decision impacts your monthly payment, total interest paid, and how quickly you build wealth through homeownership.

Let's use a realistic example: a $450,000 home purchase in Las Vegas, Nevada, with a 5% down payment ($22,500), leaving a loan amount of $427,500.

Why Lenders Push FHA Loans for Credit Scores Under 660

Lenders aren't necessarily trying to push you into a more expensive product; they are managing risk. An FHA loan is insured by the Federal Housing Administration. This government backing protects the lender if you default on the loan. For a borrower with a 640 credit score, the perceived risk of default is higher.

• Conventional Loan Risk: On a Conventional loan, the lender relies on Private Mortgage Insurance (PMI) if your down payment is less than 20%. PMI companies have their own risk models, and a 640 score combined with only 5% down is a high-risk combination, leading to very expensive PMI rates or even a denial.
• FHA's Role: The FHA was designed to help borrowers with less-than-perfect credit or smaller down payments. Its guidelines are more flexible, and the government insurance makes lenders feel secure enough to approve loans they otherwise wouldn't. The data, information, or policy mentioned here may vary over time.

Cost Comparison: FHA MIP vs. Conventional PMI

This is where the financial details matter most. Mortgage insurance is the biggest cost variable in your scenario.

FHA Mortgage Insurance Premium (MIP) FHA loans have two types of mortgage insurance:

1. Upfront MIP (UFMIP): A one-time premium of 1.75% of the loan amount. For our $427,500 loan, this is $7,481.25. Most borrowers roll this into their total loan amount, increasing it to $434,981.25.
2. Annual MIP: Paid monthly for the life of the loan (since your down payment is less than 10%). The annual MIP rate for this loan scenario is 0.55% of the average loan balance per year.

• Monthly FHA MIP Calculation: ($434,981.25 * 0.0055) / 12 = $199.37 per month

Conventional Private Mortgage Insurance (PMI) PMI rates are determined by your credit score and Loan-to-Value (LTV) ratio. For a 640 score and 95% LTV, you're in the highest risk tier. The PMI rate could be 1.5% or even higher.

• Monthly Conventional PMI Calculation: ($427,500 * 0.015) / 12 = $534.38 per month

In this Las Vegas example, the Conventional PMI is over $335 more per month than the FHA MIP. This significant difference is often the deciding factor. The data, information, or policy mentioned here may vary over time.

What Are the Interest Rate Differences?

Because FHA loans are government-insured, lenders can typically offer more competitive interest rates to borrowers with lower credit scores. A Conventional loan for a 640-score borrower will almost always have a higher interest rate due to risk-based pricing adjustments, known as Loan-Level Price Adjustments (LLPAs).

• FHA Scenario: You might be offered an interest rate of 6.5%.
• Conventional Scenario: For the same profile, the rate could be 7.0% or higher.

Combining a higher interest rate with the much higher PMI makes the Conventional loan's monthly payment substantially larger in this specific situation. The data, information, or policy mentioned here may vary over time.

Which Loan Builds Home Equity Faster in a Market Like Henderson?

Building equity is about paying down your loan principal. Let's compare how these two loans might perform on a home in Henderson, a market known for steady appreciation.

• FHA Loan: Although the monthly MIP payment feels high, the lower interest rate means a slightly larger portion of your payment goes toward the principal each month compared to a high-interest Conventional loan.
• Conventional Loan: The combination of extremely high PMI and a higher interest rate means more of your monthly payment is going to insurance and interest, not your principal balance. This slows down equity growth in the early years.

However, there's a critical difference: Conventional PMI automatically cancels once your LTV reaches 78% of the original property value. FHA MIP (for loans originated after 2013 with less than 10% down) is for the life of the loan. This means the only way to get rid of FHA MIP is to refinance into a new loan, usually a Conventional one, once you have sufficient equity and a better credit profile. The data, information, or policy mentioned here may vary over time.

Can I Use Seller Credits for Closing Costs?

Yes, and the rules here can give FHA an advantage. Seller credits, or concessions, are funds the seller agrees to contribute toward your closing costs.

• FHA Loans: Allow the seller to contribute up to 6% of the sales price toward closing costs.
• Conventional Loans: With a 5% down payment, seller contributions are capped at 3% of the sales price.

For our $450,000 home, this means you could negotiate up to $27,000 in seller credits with an FHA loan versus only $13,500 with a Conventional loan. This can drastically reduce your out-of-pocket expenses at closing. The data, information, or policy mentioned here may vary over time.

What Is the Breakeven Point to Refinance Out of FHA MIP?

This is the most important long-term strategy for FHA borrowers. The goal is to improve your credit and let home appreciation build your equity to at least 20%. Once you reach that milestone, you can refinance into a Conventional loan to eliminate mortgage insurance entirely.

The breakeven point is when your monthly savings from the new loan have paid for the closing costs of the refinance.

Example:

1. Refinance Closing Costs: Let's say it costs $5,000 to refinance.
2. Current FHA Payment (P+I+MIP): Assume it's $3,200.
3. New Conventional Payment (P+I, no MI): Assume it's $2,900.
4. Monthly Savings: $300.
5. Breakeven Calculation: $5,000 (costs) / $300 (savings) = 16.7 months

After about 17 months, you've recouped the refinance costs and are now saving $300 every month moving forward. The data, information, or policy mentioned here may vary over time.

Will a Summerlin Condo Project Even Approve an FHA Loan?

This is a critical, often overlooked, hurdle. If you're looking to buy a condominium, particularly in master-planned communities like Summerlin, your loan choice might be made for you. The entire condominium project must be on the FHA's approved list for you to use an FHA loan.

Many condo associations let their FHA approval lapse because of the required paperwork or fees. If the condo you love is in a non-approved project, a Conventional loan becomes your only viable option, regardless of the cost. Always check the HUD-approved condominium list before making an offer with a pre-approval for an FHA loan. The data, information, or policy mentioned here may vary over time. Understanding the nuances between FHA and Conventional loans is key to making a smart financial decision in Nevada. If you have a unique credit or down payment situation, working with a mortgage expert who can model both scenarios is the best way to secure a loan that builds your wealth for the long term.

Feeling clearer about the FHA vs. Conventional choice? The next step is to see how these numbers apply to your specific situation. Explore a personalized loan scenario and find the best path to your Nevada home. Apply now to get a no-obligation breakdown from our experts.

Author Bio

David Ghazaryan is the expert mortgage strategist and founder behind iQRATE Mortgages. With a mission to fund home loans that traditional banks won't touch, David specializes in helping clients with unique financial situations, including those recovering from foreclosure or bankruptcy. He expertly crafts smart, strategic, and stress-free mortgages by leveraging a vast network of over 100 lenders to secure competitive rates for investors and homebuyers alike. Praised for exceptional customer service, David has helped hundreds of families with a 97% satisfaction rate, guiding them to the mortgage they deserve.

References

FHA-Approved Condominiums

Consumer Financial Protection Bureau - What is private mortgage insurance?

Fannie Mae - Loan-Level Price Adjustment (LLPA) Matrix