FHA loans vs Conventional loans - Knowing the true comparisons

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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 :




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


Re-Blogged 7 times:

Re-Blogged By Re-Blogged At
  1. Gabe Sanders 07/10/2009 01:48 AM
  2. Tom Burris 07/10/2009 08:22 AM
  3. Kris Wales 07/10/2009 08:56 AM
  4. SarahGray Lamm 07/10/2009 10:46 AM
  5. Erica Ramus 07/11/2009 03:17 AM
  6. Tammy Woodin 07/11/2009 05:32 AM
  7. Dana Devine 08/14/2009 01:15 AM
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fha loans vs conventional loans

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Robert and Lisa Hammerstein -201-315-8618
Keller Williams Valley Realty - Hillsdale, NJ
Bergen County NJ Real Estate

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.




Jul 10, 2009 09:40 AM #28
Dan Magstadt
Paramount Residential Mortgage Group, Inc - Lake City, FL

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

Jul 10, 2009 10:34 AM #29
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

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.


Jul 10, 2009 11:11 AM #30
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans


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


Jul 10, 2009 11:18 AM #31
An Marshall
Berkshire Hathaway - St. Augustine - Saint Augustine, FL
Your St Augustine Real Estate Consultant

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

Jul 10, 2009 01:52 PM #32
Jason Sardi
Auto & Home & Life Insurance throughout North Carolina - Charlotte, NC
Your Agent for Life

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. 


Good article, by the way;)


Jul 10, 2009 02:16 PM #33
Chris Olsen
Olsen Ziegler Realty - Cleveland, OH
Broker Owner Cleveland Ohio Real Estate

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 10, 2009 04:53 PM #34
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans


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


Jul 10, 2009 05:01 PM #35
Karen Crowson
Coldwell Banker Residential Brokerage - Rancho Bernardo, CA
Your Agent for Change

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.

Jul 11, 2009 02:13 AM #36
Julie Messina
CNN Mortgage - Scottsdale, AZ


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!


Jul 11, 2009 02:48 AM #37
Joe Pryor
The Virtual Real Estate Team - Oklahoma City, OK
REALTOR® - Oklahoma Investment Properties

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. 

Jul 11, 2009 04:33 AM #39
Tammy Woodin
Bellingham, WA
Sudden Valley, Washington


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

Jul 11, 2009 05:15 AM #40
Lee Walsh
SecurityNational Mortgage - Lake Mary, FL
Executive Talent Scout for Mortgage Professionals


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 11, 2009 03:52 PM #41
michelangelo vasco
mvp realty inc. - Manhattan, NY

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

Jul 11, 2009 08:10 PM #42
Ginger Moore
Wilkinson & Associates Realty - Gastonia, NC

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

Jul 12, 2009 02:49 AM #43

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

Jul 13, 2009 01:23 AM #44
Dan Quinn
The Eric Steart Group of Long & Foster Real Estate - Silver Spring, MD
Dan Quinn

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.

Jul 13, 2009 07:46 AM #45
Darin Osenberg
Funky Quail Vintage - Nashville, TN

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!



Jul 13, 2009 03:40 PM #46
Paul McFadden
Paratex - Seattle, WA
Pest Control, Seattle, WA.

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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Jun 29, 2014 12:57 PM #48
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