FHA Mortgage vs. Conventional Mortgage Which is Best and Why?

There has been discussion on the blogs about why FHA loans are coming to prominence, but I haven't seen a side by side comparison, so I thought it was about time that we did that. FHA Mortgage Loan vs. a Conventional Mortgage Loan with a limited down payment. How do they compare?

First, the assumptions, you can't make a comparison without knowing what the parameters are. Needless to say, these are arbitrary, but fair to both types of loans. I am also going into this without knowing the result, just knowing my product. Here they are:

                                                 FHA                                        Conventional

• Purchase Price                  $200,000
• Down Payment                 3% FHA                                 5%
• Credit Score                       620
• Taxes                             $1800 year
• Insurance                         $300 year            
• Interest Rate                     6% FHA                           *7.25% + .5% cost
• UFMIP                                  1.75%                                    0
• Monthly MI                        .5% (82.05)                          1.2% ($190)
• Seller Pd C/C                      $6,000                                   $6,000

• Gross Loan                          $197,395                              $190.000

   
• P&I                                  $1183.48                              $1296.13
• Taxes                              $  150.00                              $  150.00
• Insurance                        $    25.00                              $   25.00
• Monthly MI                       $    80.83                              $  190.00

• Total Payment                   $1439.31                               $1661.13
• APR                                    6.537                                     8.479

 * Credit Score Adjustment

So, first glance, FHA wins hands down.  Part of this is due to Credit Score adjustments, so what happens if credit is excellent? Rate and MI changes for conventional, FHA stays the same. Monthly MI changes to $148.83 and rate changes to 6%/APR 6.871. So, conventional payment is now $1462.98 plus an additional $4,000 in down payment in both cases.

Additionally, standard closing costs are about 3.5% of the purchase price, and this can vary quite a bit depending on taxes, insurance, flood insurance, inspections, etc. With a conventional 5% down, you are limited to 3% of the purchase price. With FHA, you can have up to 6% of the purchase price for closing costs. That means you can use part of that to buy the rate lower and have even a better deal.

Now, to me, this means that overall, FHA mortgage loans beat conventional mortgage loans when you have a limited down payment. If you have 20% down and good credit, this comparison changes dramatically, but how many people have 20% down in this market.

Rates and terms subject to change without notice. Maximum loan amounts vary by state, county, and property type . Subject to review of credit and/or collateral; not all applicants will qualify for financing. It is important to make an informed decision when selecting and using a loan product; make sure to compare loan types when making a financing decision.

 authored by Fred Chamberlin, senior mortgage consultant,

Eugene/Springfield Oregon, 541-342-7576