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FHA loans vs Conventional loans - Knowing the true comparisons

fha loans vs conventional loans

FHA loans seem to be one of the main choice of mortgages in the last 6 months or so. There are several reasons for this, which should be spelled out below in my comparison. What I hate hearing is that FHA mortgages 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.

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% or even 5% 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. You want to see a shocking example? Here is an example of 20% down and it shows that the FHA loan was still better. Please read : FHA Loans vs Conventional Loans - 20% down - A Rude Reality Check

So you could argue the fact that this is my opinion, that FHA loans 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 $280,000 purchase price with 5% down. One reason why conventional rates are a little higher 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 679, which is above the average credit score and I will still show in this example that FHA loans are cheaper, even with 5% down.

***And keep in mind, some lenders have penalties on FHA mortgages with credit scores under 660. And many lenders can't do FHA loans under 620. Just beware of those that promise you a mortgage with scores under 620. It can happen, but they aren't as easy as advertised.***

fha loans vs conventional loans

Disclaimer : These rates are examples, but the spread shown in the example is real. To compare this scenario apples to apples, the fees are the same and with zero points. In this scenario, there is a $475 commitment fee and points. The conventional rate also includes the penalty for the 679 credit score.

Some of you might be saying that you will be adding $4,655.00 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. If you kept your house for 5 years, you would have saved $11,916 in payments in 5 years. Subtract the Upfront Mortgage Insurance premium from the monies saved in 5 years and you have saved a difference of $7,261.00!!! And one other thing that is very small, but still makes a difference. You will be subtracting a few more dollars per month from your principal because your interest rate is lower, which would offset the interest that you would write off on the 6.25% rate. Just something else to remember, but consult your tax consultant or CPA.

Lastly, keep in mind that depending on the area that you are buying or refinancing in, that you might not be able to get a conventional loan unless you have 10% down or a 90% LTV. The reason being is the mortgage insurance companies and how they view certain geographical areas and declining market areas.

For more FHA loans vs conventional loans comparisons :

FHA loans vs Conventional loans - A true numbers comparison with 5% down - 12-20-08 -Using a 710 credit score

FHA loans vs Conventional loans - A real comparison with 5% down - 11-15-08 - Using a 659 credit score

FHA Loans vs Conventional Loans - 20% down - A Rude Reality Check - 04-03-09 - Would you believe that FHA loans could be cheaper even with 20% down? Come see why and how.

FHA Loans vs Conventional Loans - 5% - 4 comparisons that you need to know - 05-02-09 -Comparing a FHA loan against 3 types of conventional loans with different types of monthly mortgage insurance. Guess who won while still using a 679 credit score.....

FHA loans vs Conventional loans - Knowing the true comparisons - 07-10-09 -A great comparison with a 679 credit score and 5% down. This example will still show that even with a better than average credit score, that FHA loans are still better in many cases.

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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 !!!!

Posted by Jeff Belonger -- The FHA Expert.com -- FHA Loans -- FHA mortgages - USDA loans on 07/10/2009 02:09 PM

Comments (45)

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Originally posted at: FHA Mortgage Expert - Tri-State Area - New Jersey/PA/Delaware: FHA loans vs Conventional loans - Knowing the true comparisons

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45 Comments on FHA loans vs Conventional loans - Knowing the true comparisons

JUL

Great comparison for consumers to see! As usual well done with great advice.

Jeff, this is some great advice not only for the consumers, but for realtors to remember as well.

Nice comparison Jeff. I find your blog very informative!

LYN.... . thank you very much for both of those compliments.... it's much appreciative. Overall, I just want people to see the true breakdown. So many loan officers don't break this down at times and give the borrower the loan that is most easiest for the loan officer, not the borrower. I have actually seen this happen personally. thanks

REBECCA.... . I hope it helps not only borrowers, but realtors and loan officers. thanks

JEN.... . thanks for the compliments and for stopping by.

I have spent the past few weeks explaining the advantages and disadvantages of the FHA product. I completely agree with you that if your credit score is not up to speed, that FHA is the only way to go. Why would anyone want to pay a higher rate? The biggest misconception is that the FHA product is only for poor credit customers. As you know, there are many other advantages besides just when your credit is low. The down payment can be as low as 3.5% on FHA, the MIP monthly payment is less. Plus, you have the streamline refinance option. Many great advantages in comparison to the Conventional Loan product.

John.... you mention some other good reasons why FHA loans are better. I have mentioned these same things in past posts. Overall, here is just a basic comparison and even this makes FHA much stronger than conventional loans. Sure, you have VA and USDA, but they are restrictive in some areas of usage. thanks for the input

JUL

Jeff, great post. I have thought recently that I wish I had been on AR a few years ago, I would have really understood so much more. I always did a good job for my clients however one can always do better. I am here now, learning all the time, and have already brought so much more to my clients as a result of what I have learned because of the generosity of those on AR.

This is a great post! Thank you.

JUL

Mr. Belonger:

Would you please provide your take on the following issue:

I am a first time buyer. I have the highest credit ratings and fico, no debt, and more than enough money for any deposit of 20% or more to purchase. So, on Monday I went into a major bank branch to request a pre-approval. I take a few W2s, a few tax returns, and my ID with me to a bank. I provide the stated info to the rep and then showed my documents as proof. She looked them over, verified, pulled credit etc. I told her the amount of loan that I wanted to get approved for because I already knew that I qualified for 3 times more and I know the range that I plan to purchase and so I wanted the approval for what I WANT to spend not what I can afford to spend. She said everything looks "terrific" and I am "approved". Then she claims inability to print out the letter. I asked her to email it to me and she claims that she can't do anything with it because the system is providing an error so she will call in an hour and fax it. I go back to the office and she doesn't call. I call her and she doesn't answer so I leave a message. The next day I decide to call the bank's corporate about the issue and a national rep looks into it and says you are definitely "approved" (the national rep also repeated the same printing error line as the local branch) but don't worry these things usually take 3 days for the underwriters to approve. I disagreed as I have gotten preapproved on the spot before and left with letter in hand. The national rep says she would fax it ASAP.

Today, I receive a fax for a loan number approval and commitment that requests I sign. I didn't have to sign for a pre-approval before and before it was a letter stating conditions and using the word "pre-approved". Now it is a multipage document requiring my signature by a certain date with loan conditions and loan committment. I don't want to sign it because I don't want to committ to anything other than finding a house. Any guesses why is this major bank using this multipage approval/committment with addendums and requiring a signature by a specified date instead of the generic letter that I was expecting? Is this something all of the major banks are doing now (I plan to try another on Friday as I don't have any free time tomorrow)? Do you think I should worry about signing the document? Thanks.

Also, would you tell me if anyone can get an FHA loan? When I asked the loan officer described in post 8 about FHA loans, she said it was not for people like me and that FHA would not benefit me at all because my fico is almost perfect and I would put at least 20% down. She refused to even pre-approve me for an FHA and then 3 days later ends up faxing me some crazy approved commitment that looks and reads like a contract.

Jeff great post as usual and another good explanation of the benefits of FHA over conventional.

JUL

I understand the FHA loan is also assumable when the buyer goes to sell. If interest rates go higher having an assumable FHA loan could be a valuable asset.

very good comparisons on FHA and conventional loans. I mostly thought beceause of the MI in FHA loans that it was always more costlier.

Price the loan out both ways and do the comparison.

ANDREA.... . thanks for the kind words & the compliments. I love teaching & educating.. and it's been good to have gotten to know you.

JESSE W. .... . overall, I would look for another lender. What state are you buying in? You don't need to meet with someone to get a pre-qual or an approval. The approval letter that you received, which sounds like a commitment letter, can be signed. Some of them ask for 1 point upfront when signing these though.

My question to you... how quickly did you get this commitment letter after you applied. That is a concern of mine. If it was very quick, that could be a red flag... and I would be glad to tell you why. Overall, I can be reached at 609-440-5133 or jbelonger@ihmci.com thanks

In regards to the FHA loan... yes, anyone can get one... but it would make no sense what so ever if you are putting 20% down with a credit score above 700. thanks

NICK & TRUDY.... . hope you all are doing well. It's been a while since we talked last. Overall, thanks for stopping by and for the compliment.

FRANK.... . that's why I love writing these kinds of blogs, because many people would think the same. Please read my one above, 20% down, a reality check. That might even open your eyes up more. Thanks for the compliment.

MIKE.... . I am not 110% sure of what you are trying to say. Is that a statement or a question? thanks

GENE.... sorry that I skipped you. I just read your comment in my in-box. Yes, having a FHA mortgage is good because it can be assumed, but there is more to it than that. Just because you have a lower rate doesn't mean that it will work. You as a buyer can only assume what is left on the principal balance of that loan and nothing more. If the seller wants more for the house, that buyer will need to come up with the difference in cash or a second mortgage. I wrote about this : FHA mortgages can be assumable .

Re: Jesse W. That scenario sounded to me like a true LOAN COMMITMENT. That's a lot different from a Pre-Approval letter and is, indeed, multipage and has to be signed because it is time sensitive. We rarely get a loan commitment until just before the financing contingency removal date in the contract of sale.

Of course, I could be wrong.

Where did this stuff about FHA becomming the new Sub-Prime!

That's the most rediculous thing I've heard in ages.

I've done many, many FHA loans and they are always fully documented and all information verified with careful underwriting review.

Where does this stuff come from???

Sounds like a broker without FHA approval trying to give FHA a bad name.

Jeff -- your posts are always good. And they are always the reason I'm thankful for my loan guy! He understands this stuff WAY better. While I know "of" the loan process, etc., this is the type of post that proves a good lender is invaluable.

;-)

Jeff - Thank you for the great post. It is extremely informative and useful for clients as well as a needed reminder for agents. Thank you for sharing your knowledge!

Laurie

Jesse..... That loan officer may not have access to FHA loans....

But as Jeff said... FHA wouldn't make sense if you want to put 20% down.

Rates are about the same and FHA would have PMI.... Unless you went with a 15yr term

Folks who are really angry these days at anything the govt has it's hand in are spreading this garbage. FHA has had a great product for many, many years. I am CERTAINLY writing alot more contracts contingent on them these days and glad to have them!

Also love your graph...best way to show a client what the end result of a comparison is! Thanks!

Jeff, good job on the comparison.

I agree with your belief FHA is NOT a subprime loan. Many borrowers who could have qualified for FHA loans were stuck into subprime loans because the lender was not FHA approved.

Jeff, thank you for this wonderful breakdown. I am going to re-blog it so that my first time home buyers can enjoy it and learn from it.

great comparision. Though I never knew the rate spread was so great.

Great comparison and informative.

Congrats on the gold star....FHA is the way to go. I live in that world and you ARE that world.

Hey Jeff,

So informative. Really great stuff here that I wish many realtors would get educated about. I hear it from other agents that FHA or less than 20% down is a less favorable offer. The scarey part is that these agents are passing this info onto their Sellers. Would love your permission to re-blog this post.

Best,

Lisa

Right on Jeff - It really gets bad when someone has a 620 score & tries to go conventional.

LENN... . I don't think you are wrong, it does sound like a commitment letter. What I am worried about is the time-line of when he received that commitment, especially after how long and the excuses to get a basic letter to begin with... and sounds like some confusion from the lender trying to explain the process and the letters...

LENN.,.... . where did the stuff about FHA being the new subprime? About 2 years ago, people started writing about this, after subprime fell apart and disappeared. And this mostly came from realtors that didn't know any better and from loan officers that never did FHA... either because their company didn't want it because of its expense or because that loan officer was previously lazy and subprime was easier. And yes, some it was brokers giving FHA a bad name because they didn't have it. I even went up against a few loan officers and owners of mortgage companies that said conventional was cheaper, even when I proved them wrong... and that was even 2 years ago when there weren't major hits on the conventional pricing because of the credit scores.

CARLA.... . your loan guy knows this stuff better than me or better than you? lol Seriously, that's not the point. I love sharing this stuff, and being creative. Thanks for the compliment and for stopping by.

LAURIE.... . yes, I think this helps many realtors and even some loan officers, especially those knew or taught wrong. Thanks for the compliment.

TOM.... . good point about 15 yr terms with FHA, and just for the fact that you could lose MI, depending on the LTV... thanks

SARAH.... . I am trying to follow you. I don't think the gov't knocks FHA... HUD and the gov't supports it. Maybe you mean the media? But yes, more and more people are utilizing FHA loans more than ever before. And thanks for the compliment.

BILL.... . thanks for the compliment, especially coming from someone that knows all about FHA. And yes, I agree that many borrowers were stuck in a subprime loan because the lender was not FHA approved. But I say that statement even more so for those lazy loan officers that had FHA, but still stuck a borrower into the subprime loan, because it was easier for them.. or because they were too lazy to try and understand FHA. thanks

KRIS.... . thanks and reblog any time. ;o) And go Inge and Victorino. ;o) Thanks for the compliment.

RUSS.... . yes, there is a spread.. and as you go lower with the credit score, the spread becomes larger. Did you check out my 20% down blog? And thanks for the compliment.

LAURA.... . thank you very much and for stopping by.

LARRY.... . you live in my world? You have never walked in these shoes before... ;o) Nor would you want to... lol Seriously, yes, for the most part, FHA is the way to go. At least in the last year.

LISA & little Robert.... . I think realtors should know the basics, but that's it. I have been reading some answers to questions on Trulia about mortgages from realtors. That scares me and some aren't even close. And yes, you can reblog these any time. You don't need to ask... but thanks for asking and for the compliment.

DAN.... . I agree, even with 20% down. Not sure if you read that blog of mine above, the comparison with 20% down? But yes, the rate is really bad, especially with 5% to 10% down. thanks

I love it when something, especially related to money, is so simply put that even I can understand it.

Belonger - In my mind, back then and even now, FHA wasn't the new sub-prime per se. Sure, they loosened up their guidelines a bit, yet my concern was folks getting involved in FHA that had no experience in Government or Conventional Lending at all. That's the only sub-prime comparison that I see as valid.

FHA is the loan du jour these days. Conventional loans had their time as did the sub-prime. So the circle goes.

Know what's in and go with it.

Right.

Good article, by the way;)

Hi Jeff -- I had a buyer recently lose out on a home solely because they were an FHA buyer and the seller accepted 10K less from a 20% conventional buyer. Go figure.

JUL

AN.... . I am glad that I could make it simple and seem easy... thanks for the comment.

JASON..... . I know FHA wasn't or isn't the new subprime... this is what some realtors have said and some loan officers. Not sure if we are on the same page, even though we have talked about it before. In any case, yes, know what is out there and how the programs work... and how to compare. And thanks for the compliment.

CHRIS.... . that was a listing agent that didn't know what they were doing. That has to be one of the more pathetic losses that I have ever heard. 10k less just because someone was putting 20% down? Again, that listing agent to educate and explain. Boy, would I love to have gotten in front of that seller and ask for a $2,500 explanation fee. They still would have netted $7,500. That's not chump change. Chris, next time that happens, give me their name, number, and address... lol

Jeff, I too think FHA has a great product, especially for first time buyers. However, what I'm encountering is a bias from the listing agent, against considering offers using FHA. In some cases that's warranted in the property is of questionable condition. But I had an agent tell me recently that he told his sellers not to take an FHA offer - they're just too much hassle. I think that bias is out there WAY too often as Chris pointed out.

Jeff,

I agree with your take on credit quality for the FHA loan. It used to drive me bonkers whenever I would hear a representative from one of the wholesale companies say that "FHA is the new subprime" - nothing could be farther from the truth. Fortunately I am hearing that statement less and less now that most of those sales people are being driven out of our industry.

Subprime loans were for designed applicants who had a hisory of slow payments due to poor credit management, or a temporary fix for a unexpected financial setback with an exit strategy to refinance into an A-Paper loan within a two or three year period.

FHA is an "A-Paper" loan and the government expects our industry to set homebuyers up for success and educate them on responsible homeownership, or they wouldn't be guaranteeing the payments. FHA was designed for applicants with young credit histories, first time homebuyers, or home buyers that desire modest housing for their family. And, in this economy FHA is beng used as a critical housing tool combined with DPA to dry up the foreclosure inventory. Good post, I am glad to see you have quite a few readers on this topic!

Julie

Great explanation. I re-blogged this Jeff. Thanks for writing it.

I have never had a problem with FHA loans, and now more than ever it is the way to go. I just want our limite here to keep going up a bit. Even though i work with lots of investors who would naturally go conventional, they didn't go subprime in Oklahoma investments because we were not bubble priced or had high negative cash flow without a negative am. I just wish that FHA would deal more with investor loans although I know that that is not a part of theri mission statement outside of some multi-family type loans.

Jeff,

Thanks for adding some clarity with your comparison. I'm re-blogging to share with buyers and sellers to make informed decisions. Thanks again!

Jeff,

Thanks for dispelling the urban legend that FHA is the new subprime!

In the past many loan officers put FHA borrowers into subprime loans because it was easier and / or their company was not HUD approved.

JUL

as a broker representing the seller you should be advising your seller client that a VA or FHA is always harder on the condition of home and more demanding for the seller. why wouldn't a seller be better off waiting for a more qualified buyer who doesn't have to go FHA or VA

thanks for a great blog. Well done. thank you for sharing!

JUL

Jeff, I've always been a big fan of FHA & VA loans but recently I've seen some of the investors/banks increase the minimum required credit score on FHA loans. Ex. 660 min. score and if it's lower, the lender is requiring up to 10% down, 35 max DTI and 2 appraisals. Have you heard of anything like this?? Unfortunately our company was one of the ones making this change.Thanks, David

This was very good Jeff - thanks! I bookmarked your post so I can refer back to it. On second thought, I think I am going to print it out as well and keep it in my file drawer for the future reference.

Chris Olsen- I thought it was the responsibility of EVERY AGENT to present every deal? Also, just curious to know if you followed up on the deal, to see if it REALLY did close>? The question in MY mind, would be...What was wrong with the property? That sucks for you! Im sorry!>..Stupidity is not anything we can control!

Karen Crowson- You need to be WORKING with Jeff Belonger! First of all, the condition would have been a problem on a CONVENTIONAL DEAL TODAY, no matter what, and WHO is doing the lending! There are no escrows for repairs on conventional loans, and who would want to loan money to ANYONE on an inferior property anyway. Here's an idea, tell the Listing agents to FIX THE BLOODY HOUSE!!!!! BIAS is created by ignorance, and the failure to understand the changes in our industry! THOSE particular agents need lender partners, Like Jeff!

#38, guaranteed, your going to get deleted!

#43. You are so wrong. VA or FHA is NOT more difficult! In fact, in many ways, they are easier! AS LONG AS THERE IS NOTHING WRONG WITH THE HOUSE, you are good to go on almost any loan!@ You need a better definition is all of "more qualified buyer". You should be teaming UP with someone, not fighting the system. FHA loans are excellent! Have your lender partner teach you more about them....so, You can present a better offer to sellers from a knowledge perspective!

Jeff, NICE JOB on this blog...and not too long too! I need to take a lesson, and heart medication now!

Darin

JUL

Jeff: Thanks for the comparison. I appreciate it. One thing you could definitely blog about if you like is the fact that FHA sometimes is the only choice. I'm talking about declining markets and PMI. I've had two cases lately where borrowers with very high credit scores (780+) haven't been able to go conventional because of PMI and a declining market. Yet FHA will approve. Interesting times, huh?

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