Important Point to remember -

Never assume that conventional mortgages are cheaper than FHA mortgages if you are putting 20% down, just because you have no mortgage insurance.

I just received a referral from Katerina Gasset the other day who wants all buyers to be approved on her bank owned properties by someone that she trusts, even if that borrower is going to use their choice of lender. The borrower must have told me that she wanted the best rate 3 times. This was up most on her mind and I don't think she heard anything else that I stated. Well, I received an e-mail today from Katerina, from the realtor that has the buyers, telling us that they went with her first choice. This is someone that the borrower trusts and who is friends with on a certain level apparently. Her credit scores are above 700, yet her husbands credit scores are around 634 and 637. Here is the sad pathetic part when speaking to the borrower. I asked her if the loan officer had her husband's credit scores and she said no, she only told him hers. OUCH - rut row !!!!  First off, no loan officer shouldn't be quoting interest rates without at least knowing the borrowers credit scores, all borrowers involved.

FHA loans have been the main source of financing in the last 6 months. What I hate hearing is that they have taken the spot of the subprime loans. This is not true by any part of the imagination. This statement is from those that are inexperienced in both the mortgage and the real estate industries. The realization has been that 30% of the subprime mortgages in the last 5 years previous to the last 2 years should have been FHA mortgages, not subprime. And that is a hard core fact.

To compound this, so many said just because you had a conventional loan, you had the better loan. This was not always true when putting 3.5 percent down. In most cases, you were told this, because that particular lender was not FHA approved. Now?  Even with 10% down and credit scores less than 680, FHA loans in many cases, will be the best mortgage for you. But here is the kicker, in this scenario that I am about to share with you, even with 20% down, the FHA loan is cheaper for you, even in the short term. And because of today's rates and market conditions, paying points might be better than ever before.

So you could argue the fact that this is just my opinion, that FHA mortgages in many cases would be better for you. True, even though I have over 16 years of experience as a loan officer in the mortgage industry. But numbers don't lie. Let me show you.....

The example below is based on a $460,000 purchase price with 20% down. One reason why conventional rates are a little higher and cost more pooints in this scenario as in FHA rates is because Fannie Mae and Freddie Mac have added penalties per se. If you are putting down less than 30% and your credit score is less than 720, certain fee penalties would apply to you, which would increase your rate.  The FICO (credit score) that I am going to use is 637 and I will still show in this example that FHA loans are cheaper, even with 20% down.  

***And keep in mind, some lenders have penalties on FHA mortgages with credit scores under 620. And many lenders can't do FHA loans under 620. I can still do them down to 600.***

Disclaimer :  These rates are examples, but the spread shown in the example is real. To compare this scenario apples to apples, it couldn't be done because of the large pricing hit on the credit scores for conventional loans. In this scenario, there are no lender fees, just points. The conventional rate and points also includes the penalty for the 637 credit score, which is 3 points.

Some of you might be saying that you will be adding $6,440.00 onto your principal balance if you did the FHA mortgage because of the FHA one-time mortgage insurance premium. This is correct and I don't want to confuse you with more numbers and charts. But here is a quick breakdown. Here is a break down of the costs for the both scenarios.

As you can see, there are a few different ways to look at this. To compare apples to apples on the upfront mortgage insurance, let's pay it off in cash, using the same monies that you were using to buy the conventional rate. As you can see you still save $237 out of pocket on the FHA loan and now $71.53 a month, even with mortgage insurance.

My advice?  Don't pay the UPMIP, because you will still have a lower mortgage payment and keep in mind, you also have a tax write off on the higher loan amount. One more important fact that even many loan officers don't know. The monthly mortgage insurance on the FHA loan will fall off in 5 years. When this happens, your savings is now increased to $191.77 a month.

Lastly, here is one more comparison to show what happens to your principal on the FHA loan scenario compared to the conventional scenario.

As you can see here, it would take about 6 1/2 years to recoup the upfront mortgage insurance if you included it on the new mortgage. But don't forget that you put $6,687.00 in your pocket because the FHA loan was cheaper in points.

If you ever have any questions about FHA loans and comparisons, please don't hesitate to call me or e-mail me.  jbelonger@ihmci.com

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Experience & Knowledge at its BEST !!!

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For more information on FHA loans, please go to this link. The FHA Expert

For more information about the 2009 Tax Credit for First Time Homebuyers : 2009 Tax Credit

For important mortgage insight to watch for, please read : Consumers need to be aware of these Red Flags !!!!

Copyright © 2009 by Jeff Belonger