FHA Loans vs Conventionals Loans - Things you should know about even with 10% down - 9-19-09

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

 

fha loans vs conventional loans

 

FHA loans seem to be one of the main choice of mortgages in the last 12 months or so. There are many reasons for this. And FHA loans will definitely be the main choice for anyone buying a condo now. More on that later.. 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 from 2002 to 2006, 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?  

And sellers, don't listen to your agents on how bad FHA loans are.

 

 

 

The example below is based on a $300,000 purchase price with 10% 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 and or points.  The FICO (credit score) that I am going to use is 659 and I will still show in this example that FHA loans are cheaper, even with 10% 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. Please read - Credit scores/FICO scores - I need a 700 credit score? ***

fha loans vs conventional loans

 

 

 

 

 

 

 

 

 

 

Disclaimer :  These rates are examples of today's pricing, and the spread shown in the example is real with the same profit margin for both sides. To compare this scenario apples to apples, there are no lender fees and with a half of a point. The conventional rate also includes the penalty for the 659 credit score, hence why there is a half of a point charge, because of the large pricing penalty for the credit score.

 

 

Some of you might be saying that you will be adding $4,725.00 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 $12,646.20 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 $7,921.21!!!   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, 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.

Which leads me to the issues about Condos. Not only are there restrictions from the MI companies (Mortgage Insurance companies) in regards to what area you live in, but that many lenders won't go above 80% LTV's now on conventional mortgages. On a FHA mortgage for condos, you can still go up to 96.5%, depending on the state, but you still have to make sure that the condo association has been FHA approved. There has been a major change on FHA condo spot approvals.  Please read : FHA condo changes for spot approvals -

 

 

 

 

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 of Infinity Home Mortgage Company, Inc

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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 (9)

Teri Eckholm
Boardman Realty - White Bear Lake, MN
REALTOR Serving Mpls/St Paul North & East Metro

Jeff--Almost all FHA buyers are better sticking to the FHA plan as they will have a lower down payment and interest rate. I have had several first time buyer have their loan officer do the math and they always stick with FHA. They do the math because there are many lender owned homes that will not pass FHA...many do not have working kitchens or will require extensive repairs that the bank or short-sale owner is not willing to make. So the question is asked and the buyer ends up continuing to search for a home that will pass FHA. They are out there but with so many FHA qualified buyers, good FHA approvable homes sell quickly!

Sep 19, 2009 02:05 AM
Katerina Gasset
Get It Done For Me Virtual Services - Wellington, FL
Get It Done For Me Virtual Services

Jeff- I know that you know what you are talking about when it comes to FHA. It is also a great program for self employed people who really did benefit from no doc loans. Thanks for getting our FHA deals done with the buyers our buyer agent is working with:)

Sep 19, 2009 07:02 AM
Tim Bradford
Cleveland, OH
NMLS 250013

Jeff, I do agree with you that FHA is most likely the better option even with 10% down.  At the same time for comparison do you need to include the FHA upfront MIP in the comparison?   Possibly increasing the points used for the comparison.   .50 Points for the FHA Option then 2.25 points for the Conventional Option to make the comparison equal.   The only problem with that is as we know the upfront MIP is financed, the added points would need to be paid in cash.   The only other issue I have with your math is the Conv PMI factor appears to be .75%.   That seems high for a 10% down payment, but then with a 659 CS it may be correct. Hard to find because the PMI company I use normally requires 680. 

Again, I agree FHA is most likely the better option.  Does the PMI company that you used for the .75% PMI Factor offer a "Single Premium" option.   At a 680 score the company I normally use has a one time premium of 1.95%.   With the higher score and the one time premium it might be more of a toss up as to which is the better option. 

Just pointing out that there is not one "BEST" option for a buyer.

Sep 19, 2009 12:52 PM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

 

TERRI... . yes, if the math is down correctly, FHA is beating out conventional loans on many scenarios, even when a borrow has a 700 score.  In regards to those needing work, hence why the borrower will look for another property, why not do a FHA 203-k loan?  So I fault some loan officers and or realtors on this.  Then again, many lenders either don't do 203-k loans or just don't know how to do one well. I just spoke to a borrower a few days ago who applied with a lender in June and was suppose to have settled in mid August and it's now mid September... and they are now telling her 3 more weeks. thanks

KATERINA.... . my pleasure.... and yes, I even once had a borrower that was referred to me that their previous loan officer was taking them No Doc... and I said, just let me look at your tax returns...  I was able to get him done as a full doc.  Either the loan officer was lazy or just couldn't read a tax return. PS... I am pretty good with conventional loans also.  ;o)  Besides,that first loan I closed for you all was actually a conventional loan and that previous loan officer was also trying to do the loan as a stated loan, but couldn't.  I did it as a full doc conventional loan.  thanks for your trust and support.

 

TIM.... .  as much as I like that you read many of my blogs and comment... supporting my blogs...  you might want to read the blog again. I mentioned all of this. Not only in my chart do you see a higher loan amount, showing the one time MIP, that I mentioned the one time MIP of $4,725 in the 2nd paragraph below the chart, but right below the chart, I mentioned in the disclaimer the penalty for the conventional fico score is already included... hence the higher rate. And I just went back and read my blog again, and I even mentioned the penalty for the conventional credit score pricing hit in the 3rd paragraph from the top. I learned 2 years in blogging that I need to not only mention everything, on how I got to where I got in my figures, but sometimes mentioning it twice... so yes, I covered everything that you mentioned... I have always loved doing these kinds of breakdowns since I first got into the business in 1992 and pride myself on these. Not to sound cocky, but I hardly miss something like what you mentioned when I do these comparisons...  so the answer in this case is that FHA wins no matter what.

Secondly... in regards to the MI... how can you question my MI when you say that you have a company that will only go to 680. What should that tell you in reality? Anything under 680 is going to be much higher...  and lastly, even with your single premium, FHA will be better....  it's already better just in regards to the comparison of the P & I.  And if you read my other comparison links above, I even did one showing 4 comparisons...  3 different MI comparisons against FHA....  FHA vs conventional with MI comparisons

Overall.... sorry if I was sounding like a stickler,  but I do pride myself in giving out info and I always love when people challenge me. And yes, any of us can make a mistake at any given time... I am always fearful of that... but I also double check my work and for the fact I have been doing these exact types of comparisons for the last 18 months....  it's embedded in my mind...  ;o)  thanks

 

Sep 19, 2009 02:07 PM
John Cannata
214-728-0449 http://TexasLoanGuy.com - Frisco, TX
Texas Home Mortgage - Purchase or Refinance

I think it still goes to show that a lower FICO is always better to go with FHA products over Conventional. You could have even used a higher down payment and the example still would have been a good one. Unfortunately, the lower your score the higher that rate is going to be. Even with paying MI, its usually the best option. Thanks for the great example Jeff.

Sep 19, 2009 04:39 PM
Gabe Sanders
Real Estate of Florida specializing in Martin County Residential Homes, Condos and Land Sales - Stuart, FL
Stuart Florida Real Estate

Jeff, great example and comparison.  Another re-blog coming.  Thanks.

Sep 19, 2009 11:52 PM
Monica Bourgeau
Portland, OR
Business Coaching

Jeff - great example! I hope you don't mind that I "Reblog" your post so often but I love to provide loan basics to my readers and don't have your expertise in the area.

Sep 20, 2009 05:21 AM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

 

JOHN.... .  thanks for the input.  Yes, I agree, even with a greater down payment, which I did a comparison with 20% back 4/3/09.  But I don't usually do many of those examples, because most people don't have more than 5% to put down in many markets.  thanks and thanks for the compliment.

GABE... . thanks for the compliment and thanks for reblogging this...

KEVIN & MONICA... . have no problem with you all reblogging this, hence why I love writing these and leaving the reblog button open.  And thanks for the compliment...

 

Sep 26, 2009 04:48 AM
Dagny Eason
Dagny's Real Estate - Wilton, CT
Fairfield County CT, CDPE Homes For Sale and Condo

Jeff - once again, a great post.  I dug past your more recent post into this one, as I have a bank (REO) questioning the validity of my clients' FHA loan compared to a "conventional loan."   Thought I would "Go to the expert..." for evidence.

Jun 10, 2010 01:31 AM