FHA Loans vs Conventional Loans - 5% down - Things you need to know !!!!

By
Mortgage and Lending with Social Media - Infinity Home Mortgage Company, Inc

fha loans & fha mortgages

For several of you that read my blogs, I try and do a FHA vs Conventional purchase comparison once every few months.

FHA loans have been more wisely used in recent months as the choice of mortgages. 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. A recent survey has stated that FHA loanscould be more than 60% of all loans originated for the 2nd quarter of 2009.

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 or even 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 700, 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..... and in this scenario,

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 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 now.  We don't. And many lenders can't do FHA loans under 620. I can still do them down to 600. Just beware of those promising you FHA loans under 600, they don't close as much as promised.***

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 1.75 points. In this scenario, there are no lender fees. The conventional rate also includes the penalty for the 679 credit score.

 

 

Okay, Jeff, you used 4 total examples. I am confused. A better than average loan officer will use all 4 comparisons, to show you the bang for your buck.  I will explain each one below.

 

Conventional vs FHA - Your monthly savings is $170.36, favoring the FHA loan. 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 $11,115.00 in payments in 5 years. This is a difference of $6,218.00 that you have saved!!!   And one other thing that is very small, but still makes a difference.

 

Conventional Financed MI vs FHA - On the conventional loan, you can get a huge discount by adding the mortgage insurance onto your loan amount. Now your FHA monthly savings is only $37.83 a month, but you are now adding $4,560 to your total loan amount on the conventional loan. That comes out to an additional $76 a month over a 5 year period, if you wanted to pay down your mortgage to the same as the FHA loan. So now your total monthly savings is $113.83.  Yes, you do get a larger tax write off on the mortgage insurance being financed, but with the lower rate on the FHA loan, you also subtract more off the principal quicker.

 

Conventional Lender Paid MI (LPMI) vs FHA - On the conventional loan, you are paying a higher rate, which part of it pays for your monthly mortgage insurance. Your monthly savings on the FHA loan is only $74.44. In 5 years, you saved $4,466. But you added $4,897 onto the FHA loan, which means that in 5 years, you came out $431 better on the conventional loan in 5 years. But hold the presses...  You get a higher tax write off, because you added more money onto your FHA loan and you are slightly reducing your principal because you have a interest rate that is 1.25% lower than that of the conventional loan.

The end result on the 3rd comparison? You will still come out ahead on the FHA loan. But let's take it a step further.  Take your savings of $74.44 a month and add it back into your payments monthly for 5 years. Guess what, my principal balance in 5 years on the FHA mortgage is $5,199 lower than that conventional mortgage.

 

 

Again, a very good loan officer should understand these comparisons and be able to show them to you, if you need to see the numbers to help make your decision. I have heard many borrowers in the past say that their loan officer did these comparisons and suggest the conventional loan. Rut row... I didn't fudge these numbers. ... just a FYI.

 

Another Footnote : 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 higher rate. Just something else to remember, but consult your tax consultant or CPA. 

 

For more updated information on Conventional PMI (private mortgage insurance) - Please read this detailed blog by Robert Rauf. The new world of PMI - update (FHA loans save the day)

 

 

For more FHA loans vs conventional loans comparisons :

 

 

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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

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

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

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For information about FHA myths & FHA rumors, please read : FHA Myths & Rumors

 

Copyright © 2011 by Jeff Belonger of Infinity Home Mortgage Company, Inc

Comments (49)

Jason Sardi
Auto & Home & Life Insurance throughout North Carolina - Charlotte, NC
Your Agent for Life

Exactly how many years of experience do you have?

Unless you have a 740 Credit Score and 20% down, FHA is the loan du jour in most cases.  That said, I heard a vicious rumor that you were perfect & God-like.  Any truth to these tellings?

 

your despicable friend,

 

Sardi

May 03, 2009 05:53 AM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

 

JOE.... . well, thank you very much for those kind words. It's much appreciative.

CHRISTINE.... .  I think it's a start. The two that I hear most are that FHA loan's closing costs are higher and that they can be more expensive because of the upfront mortgage insurance. Even the first part of the statement can be tied to the second part of my answer. I will be writing a blog on this today or tonight.  thanks and thanks for the compliment.

 

JASON.....  aren't you the funny devil... just don't quit your day job.  lol  In regards to credit scores, I would like to say under 700, but again, it comes down to the state that you live in also, if putting 5% down, because of the declining market areas. 

In regards to my years in this business?  I think it's like 58 years?  Oh, wait, I am only 42.. lol  And no, not god or perfect, far from both, but damn good at what I do.  ;o)  Thanks for the comment.

 

May 03, 2009 06:19 AM
Michael Barrow
Keller Williams Realty - San Diego Metro - San Diego, CA
Realtor, San Diego CA Real Estate

Thanks for the info Jeff.  Many more clients seem to be going the FHA route these days, so it's nice to see the numbers.  It also helps to have higher DTI limits for the FHA as well.

May 03, 2009 03:34 PM
Roland Woodworth
eXp Realty - Clarksville, TN
eXp Realty

Jeff: Great information on the comparisons. Always great to get your updates.

May 03, 2009 04:16 PM
Gene Riemenschneider
Home Point Real Estate - Brentwood, CA
Turning Houses into Homes

I have never seen it with your detail, but just the assumable factor of FHA is a selling point over conventional.

May 03, 2009 04:38 PM
Antonio M. Cardenas Broker Associate
RE eBroker Group - San Leandro, CA. - San Leandro, CA
"The Realtors In Motion"

Jeff, that took you some serious time to put this post together and share it with all of us, I find it very useful and informative, there were a couple of things I did not know about, but I feel that I understand FHA loans a bit more. Thank you for your thoughtfulness.

Antonio

May 03, 2009 05:49 PM
Anonymous
David Glasier

Jeff, Thanks for the info. So many people were re-programmed during the boom not to use FHA. It's always been a Great loan.

May 04, 2009 01:18 AM
#36
Lyn Sims
RE/MAX Suburban - Schaumburg, IL
Schaumburg Real Estate

Great explanation and very clear on the differences.  Good information for the consumer to sift thru when looking for the dollar differences on Conv vs. FHA.  You also bring up a good point about 'steering' toward Conv when the lender themselves are not FHA approved.  They forget to tell Mr. John Q Public that info.

May 04, 2009 02:02 AM
Gary Meek
NewVision Realty Group - Roseville, CA
(916) 995-9385

Nice to see someone who knows what is really going on.  Very well put.  i uses to be a Mortgage broker, but bailed as FHA was too difficult to get in with.  I moved to Real Estate which was the best thing I could have done.  Especially because there are very well versed and experienced folks such as yourself that can truly help these folks better than I could have.

 

May 04, 2009 02:40 AM
Joetta Fort
The DiGiorgio Group - Arvada, CO
Independent Broker, Homes Denver to Boulder

FHA is a problem around here in the entry-level price range, when purchasing a bank-owned. The FHA buyer never seems to be the one who wins, and all the best deals out there have multiple offers. I suspected it was because the banks are advised by their agents that the house won't work for FHA because of conditions. I just had clients switch to conventional specifically because there were no appliances in the house, and we closed last week!  So I love a lender that looks into qualifying them for both, and can explain the pros and cons of each.  Thank you!

May 04, 2009 02:52 AM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

 

MICHAEL..... Yes, many more seem to be going FHA now. What scares me though are some of the lenders and loan officers that sold mainly subprime, are treating FHA as subprime. I hear from many borrowers that are sold on just FICO score and not their overall credit. I just had one over the weekend, that her loan officer from B of A said that she fir the credit score of 620. After going over her credit, she had some lates and some collections. I asked her if the previous loan officer went over this with her and she said no. That is scary, that he qualified her on her credit score. She needs some work on the credit. And yes, higher DTI's help also.  thanks

ROLAND.... . my pleasure and thanks for the compliment & for the support.

 

GENE..... . I love doing detailed, thought out, scenarios and comparisons such as these. The problem is that they do take some time if done correctly.

In regards to the FHA being assumable.  Yes, it's a great feature, but people need to be more aware that there are other issues when assuming a FHA loan.  FHA loans can be assumable, but beware of some minor pitfalls.   thanks

 

ANTONIO.... .  yes, it did take some time, but that is the part that I truly love about my job, because I would have to say that at least 50% of all loan officers don't do these types of comparisons, when you have a borrower that is borderline.  thanks and I am glad you could pick something else up from this.

 

May 04, 2009 03:26 AM
Virginia Hepp - Mesquite NV REALTOR
Desert Gold Realty - Mesquite NV Homes For Sale - Mesquite, NV
Mesquite NV Homes and Neighborhoods - Search MLS

Hi Jeff, thanks, I will use this comparison chart to help my buyers.  You hit a good example price for this area, too, works well for me.

May 04, 2009 03:26 AM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

.

DAVID... . not only were some not programed not to use FHA, because it did take longer for them, but might have been a better outlet for their borrower, but that many weren't taught the differences either. You can blame management or that specific mortgage company also. I knew of some mortgage sweat shops that focused on closing loans quickly and cheaply on their end, and not for the consumer.  thanks

LYN..... thanks for the kind comment. Yes, I have caught some lenders that steered that borrower into a conventional loan, come to find out that they weren't even FHA approved.  Or that they lost their FHA license to write FHA loans. And no, they don't forget to tell Joe Public... lol  thanks

GARY...... thank you very much for the kind comment.  And I wouldn't necessarily say that you failed as a mortgage broker, but that times have been tough for many of us and there are too many loan officers fighting over certain deals... a lot of bait and switching with false advertisement or just lies to get the borrower to use them.  So they could have failed you.  But glad things are going well know, as a realtor. thanks for stopping by.

 

JOETTA.... . sure, some properties might not be in top shape, but FHA appraisals aren't as tight and restrictive as they once were in the 90's.  And there are the 203-k loans and the 203-k streamlines... and the streamlines don't take as long as many say they do.

In regards to the client that you just had, that went conventional, because there were no appliances in the house. Please describe appliances.  Under FHA, all we need in the kitchen is a working stove/oven and a sink. ... unless the contract says that the seller is keeping the refrigerator in the house. But that is all that is needed to approve a FHA loan in regards to appliances. thanks

 

VIRGINIA....  I am glad that I could help and that this comparison was o target for you and your clients.  thanks

 .

May 04, 2009 03:42 AM
Robert Rauf
HomeBridge Financial Services (NJ) - Toms River, NJ

Jeff, There is still so much Negativity floating around RE FHA loans that it is just plain silly. We need to educate the Real Estate world, and our buyers that there is nothing wrong with an FHA loan. Not only is it better for a buyer when you compare monthly payments and cash out of pocket, but often it is the ONLY way to get them approved.

The one piece that we all need to understand is FHA may even be a better choice for some buyers that have 20% down. The Conventional "add ons" for credit score and LTV's can be ugly today.

Here is a link on my post that talks about PMI, with a touch of FHA that is a good balance to yours:

http://activerain.com/blogsview/1059487/The-new-world-of-PMI-FHA-SAVES-THE-DAY

 

May 04, 2009 03:48 AM
Darin Osenberg
Funky Quail Vintage - Nashville, TN

Congrats on the Feature. 

I am bookmarking the post.

Thank you

Darin

May 04, 2009 04:46 AM
Jan Evett
The Premier Property Group LLC - Rosemary Beach, FL
Broker Associate, 20 years+ in real estate

Bookmarked.  Love the 4-Option Comparison.  I'm glad you keep us up to date with this information on a regular basis.  It's great information especially when things are changing so quickly in the industry. 

May 04, 2009 07:07 AM
Paul Francis
Francis Group Real Estate - Las Vegas, NV
Las Vegas Real Estate Agent - Summerlin Homes

Jeff,

Nice breakdown and comparison with a good explanation that is easy to understand.

May 04, 2009 07:14 AM
Beau Ferguson
JPAR Properties Group - Charlotte, NC
Realtor & Relocation Specialist / Rated 5 stars

Great Job Jeff..........hope you don't mind the reblog! More people should be enlightened. Thanks for sharing!

May 05, 2009 05:09 AM
Brian Schulman
Coldwell Banker Residential Brokerage, Lancaster PA - Lancaster, PA
Lancaster County PA RealEstate Expert 717-951-5552

Jeff, good analysis.  You've shown me why FHA can be a better choice even with 5% down.

Jun 28, 2010 01:36 AM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

 

Robert.... thanks for that link from back then, even though some things have changed.  I remember reading that post of yours and thought it was excellent.  Overall, yes, it does come down to us educating the general public and many realtors about FHA loans.  thanks 

Brian S. ...  thanks..  I will be doing a new one of these this week. The reason being is because things keep changing, even with conventional loans, and because rates are lower... and because MI on both conventional and FHA have changed.  thanks

 

Jun 29, 2010 05:50 AM