FHA loans vs Conventional loans - A true numbers comparision with 5% down

 

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.

The subprime loan for many years could go down to a 500 credit score, depending on your equity position. But your rate was usually higher. If your score was higher, the less you needed to put down, the lower your rate. Sounds good, right?  Wrong, because the subprime rate was usually higher than the FHA rates.

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 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.

 

 

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 $300,000 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 710 and I will still show in this example that FHA loans are cheaper, even with 5% down.  This was a request from Laurie in Portland, Oregon. I wrote a blog about comparisons, but using a credit score of 659. A FHA loan vs Conventional loan comparison with a credit score of 659

 

***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 580. I can still do credit scores down to 500 with a manual underwrite.***

 

Type of Mortgage	Conventional Loans	FHA Loans
Purchase Price	$300,000	$300,000
Mortgage amount w/5% down	$285,000	$289,987 w/MIP
Interest Rate with zero points	6.25%	5.625%
Principal & Interest Payment	$1,754.79	$1,670.24
Mortgage Insurance payment	$185.25	$118.75
Total mortgage payment w/P&I and mortgage insurance	$1,940.04	$1,788.99
Monthly Savings		$151.05 per month

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 are no lender fees or points. The conventional rate also includes the penalty for the 720 credit score, which is only a 1/4 pt., not a 1/4 percent.

 

Some of you might be saying that you will be adding $4,897.00 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, which most people sell in a 6 year period, you would have saved $9,063 in payments in 5 years. This is a difference of $4,166 that you have saved!!!   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. 

 

 

A Chart for the Money Geeks

Type of Mortgage	Conventional Loans	FHA Loans
Purchase Price	$300,000	$300,000
Mortgage amount w/5% down	$285,000	$289,987 w/MIP
Interest Rate with 1 point	5.00%	5.00%
Principal & Interest Payment	$1,529.94	$1,556.77
Mortgage Insurance Payment	$185.25	$118.75
Total mortgage payment w/P&I and mortgage insurance	$1,715.19	$1,675.52
Monthly Savings		$39.67 per month

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 1 point. In this scenario, there are no lender fees. The conventional rate also includes the penalty for the 710 credit score, which is only a 1/4 pt., not a 1/4 percent.

 

One of the first questions that a loan officer should ask you is what type of payment that you are comfortable with. That question should shortly then be followed with this... "how much cash do you have to work with or want to work with." The reason being, as you can see in the example above, I was able to buy the rate down with just 1 pt.  And this happens on and off during the course of the year, but some of the spreads between the rates aren't as far apart than you would think.  It use to be a rule of thumb that 3/8 of a point more would drop your rate 1/8 of a percent. A few months ago, in some cases, it was a half of a point to buy the rate down an 1/8 of a percent. As you can see, the apread is nothing at all, especially on the conventional side of things.

A very good loan officer will look at the different spreads.  And if they do their job correctly, they could advise you to pay a little more or try to get a gift to buy the rate down. In this example, it would cost you an additional $2,850 at closing. Another great aspect of FHA loans is that you can get a 100% gift from a family member. In regards to conventional loans, you have to have 5% of your own money into the transaction. And you don't have to prove gifts if you put 20% or more down.

In regards to the scenario above, as you can see, you are only saving $39.67 per month. Sure, you break down the numbers with a fine tooth comb, when talking about interest deductions, MIP write-offs, etc, etc. But the reality of it all is that the average consumer needs the actual cash savings now, not later. So in this scenario, sometimes a few dollars a month now, is better than the fact that you have to add onto your loan amount the FHA MIP monies. In this scenario, it would then take you about 10 years to recoup the Upfront Mortgage Insurance Premium.  But again, not a huge savings, but depending on how you view this, even with a 710 credit and 5% down, your initial payment on a conventional mortgage is going to be more than a FHA loan.

 

 

 

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

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