FHA Loans vs Conventional Loans - A real comparison with 20% down - Part 1 of 3

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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 24 months or so. There are many reasons for this. 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. But why are FHA loans getting bad press now, stating that they are the most defaulted loans recently?  Read this : We should ABOLISH FHA loans...

 

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% to 20% 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?  Please continue...


 

 

The example below is based on a $300,000 purchase price with 20% 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 20% down.  Keep in mind... Don't ever be fooled by that loan officer that says, don't worry, you can refinance later.  This is a bad statement for many reasons that I will write about another time.

 

 

***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. At Infinity Home Mortgage, I can do credit scores down to 600 now. 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 $4,200.00 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 spent $621.00 more in payments in 5 years on the FHA loan. Does this mean that the FHA loan is still worse for you? No, it all comes down to your goals. Read on... In 5 years, your principal balance on the 5% would be $1,574  more than the 5.75% rate.

Here is the kicker and why you need a trusted loan officer to educate you. One important fact to remember.... The FHA monthly mortgage insurance in this scenario will fall off automatically in 5 years. Which means an extra savings of $100 per month. So just in another 15.74 months, you break even basically. Yes, there are smaller numbers to review. What if you stayed in your house for 10 years? How many of you move out of your house in less than 5 years, especially in today's economy. Just food for thought.

 

 

This information basically states you don't automatically do a conventional mortgage with 20% down over a FHA mortgage. Numbers don't lie, but not being educated about such numbers do mislead.

 

 

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 - The spot approval has been extended to 2/1/10.

 

 

Make sure you know about the NEW FHA loan changes : FHA loan changes for 2010 & why they changed. Reasons for these FHA changes and when they go into effect.

 

 

 

For more FHA loans vs conventional loans comparisons :

 

Donw Payment Series - A Must Read -

  • FHA loans vs Conventional loans - Don't be cash poor!! - Part 2 of 3 - 01-29-10  I want to show even a bigger difference if you put less down. And even if you decided to put less than 10% down, because cash is king now. You can't predict even next week. And keeping in mind of some misleading rumors, that you need more than 10% down to buy a house.

 

 

 

 

 

 

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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!

HUD

 

 

Copyright © 2010 by Jeff Belonger of Infinity Home Mortgage Company, Inc

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- FHA Loans - USDA Loans - VA Loans -

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Experience & Knowledge at its BEST !!!

 

 

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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!

HUD

 

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

 

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

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Re-Blogged 6 times:

Re-Blogged By Re-Blogged At
  1. Gabe Sanders 01/28/2010 10:58 PM
  2. Broker Nick 01/30/2010 12:23 AM
  3. Gabe Sanders 01/30/2010 04:16 AM
  4. Brian & Marie Spray 02/05/2010 05:18 AM
  5. John Thomas 02/12/2010 02:29 PM
  6. Missy Caulk 02/13/2010 01:52 AM
  7. John Sieling 05/30/2012 10:25 AM
Topic:
Lending / Financial
Location:
New Jersey Camden County Cherry Hill
Groups:
Realtors®
Mortgages
All About Mortgages/Mortgage Networking
1st Time Buyers
The FHA Mortgage Group
Tags:
interest rates
fha
fha loans
fha mortgages
fha home loans
fha mortgage rates
fha loans vs conventional loans

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Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

HA!  I sold a home to a buyer in Virginia who had a choice of FHA or 20% down.  The builder's lender didn't even offer a 10% down conventional.

 

Jan 28, 2010 03:41 AM #1
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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 am trying to follow and understand your comment.  You said.. "The builder's lender didn't even offer a 10% down conventional."

Are you saying, based on my blog post above, that the lender was good or bad that they didn't offer even 10% down?  I remember reading a comment that you stated this same thing, but not sure if that comment either was in another post of mine and or one of yours.

In any case, there are some reasons why some can't offer conventional loans even with 10% down. Even sometimes the loan officer assumes what is best.  But I do know that each borrower should be looked at carefully,even if they have a large down payment.  thanks

 

Jan 28, 2010 03:51 AM #2
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Larry Bettag
Cherry Creek Mortgage Illinois Residential Mortgage License LMB #0005759 Cherry Creek Mortgage NMLS #: 3001 - Saint Charles, IL
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I don't know why FHA is getting such a bad rap.  Contrary, I think that it should be getting a great rap....It, singlehandedly has salvaged the real estate market.  I think that your numbers don't lie.  I've seen some of your prior posts where other L.O.'s rip on you for the pricing your showing.  But many folks go by hearsay, inaccurate infomation and/or just rumors.  Frankly, a lot of consumers and realtors work with shoddy lenders, who happened to do an FHA loan, and as a result, blame FHA.  Good post.

Jan 28, 2010 04:15 AM #3
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Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

My buyer had cash to make a 10% down conventional loan. 

He originally wanted to do an 80/10/10 but that wasn't offered by the builder's lender.  So, he was ready to do a 10% down and pay PMI. 

BUT, the builder's lender offered only a 20% down conventional loan OR FHA with 3.5% down. 

There was about $40K in builder incentive tied to using the builder's lender and the rates were good.  They just, for some strange reason, didn't offer a straight 10% down conventional. 

Made no sense to me.

At any rare, the buyer went with another builder/community.

 

Jan 28, 2010 04:19 AM #4
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Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

 

LARRY... . there are many reasons why... some oif it now is because of the misinformation that FHA loans are defaulting at a very high rate. Okay, they are... But then you don't hear the reasons why, such as what I wrote about in this post.. We should ABOLISH FHA loans...

As you and I both know, it comes down to properly educating the consumer and the real estate community. Just as mentioned that even some loan officers bashed me in my past comparisons, because they said my conventional rate was too high and that I was a crook.. lol  All I did was come back and ask..."do you know how to properly read a rate sheet?  Obviously you don't....  "  Because they miss the 2.5 pts and 3.0 pt hits on conventional loans, depending on the fico score and your down payment. That alone is very very sad & scary...very scary...  thanks

 

LENN... .  there is an 80/10/10 that has been brought back into the market, but FHA still would be better, because of the rates for the 80/10/10.  And I still couldn't compare the 10% down conventional with the FHA 10% down, because the credit scores play a huge roll. But please read this post that I wrote... a 10% comparison between FHA & Conventional. This should be an eye opener even more, showing that your buyer with 10% down would have been better with a FHA loan.  And that builders lender should have pointed this out.

On another note.. there is the kicker.. 40k in builder incentives to use the builders lender... hhhhmmmm..   I have talked about this many times. In most, not all, the builder does better if you use their lender...  And yes, something is fishy and wrong just for the fact that the lender only offered 3.5% down???  Talk about comparing apples to apples.. lol  thanks for coming back.

 

Jan 28, 2010 04:36 AM #5
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Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

HA!  The difference in the rates was only a quarter percent.  Probably because my buyer's credit score is in the 800s.

The builders in this area almost all tie the incentive to using their mortgage company.  The pricing structure of that builder practically guaranteed that it would happen.  $40K in free upgrades and $10K closing IF. . . . . .

Jan 28, 2010 05:53 AM #6
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The Somers Team
The Somers Team at KW Philadelphia - Philadelphia, PA
Delivering Real Estate Happiness

Jeff - As usual, great comparison in this illustration.  I can see why FHA is the way to go more often than not ! 

Jan 28, 2010 09:56 AM #7
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Lisa Hill
Florida Property Experts - Daytona Beach, FL
Daytona Beach Real Estate

Yay! A chart! lol.  When all else fails (IE: I have no idea what your talking about=P) I can always read a chart!  =D

Jan 28, 2010 02:34 PM #8
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Gabe Sanders
Real Estate of Florida specializing in Martin County Residential Homes, Condos and Land Sales - Stuart, FL
Stuart Florida Real Estate

Thanks Jeff, great info again.  I'll be re-blogging this one also.

Jan 28, 2010 10:57 PM #9
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Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

 

HEY EVERYONE...  As I was working on my part 2 and I noticed that I basically had the wrong monthly savings in the wrong spot. But because of this example, it really didn't make a difference to my whole point. I hardly make these kinds of mistakes, but it happens. But it comes down to understanding what truly needs to be explained and why...  and most importantly, that this post reflects that you need to review your goals for 3 years, 5 years, 7 years, and possibly 10 years when buying a home. It could make all the difference in saving or losing thousands of dollars.  thanks

 

Jan 29, 2010 03:51 AM #10
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Gita Bantwal
RE/MAX Centre Realtors - Warwick, PA
REALTOR,ABR,CRS,SRES,GRI - Bucks County & Philadel

Thanks for a great post.I will bookmark posts about FHA as more buyers are looking for FHA these days

Feb 02, 2010 04:28 AM #11
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Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

 

LENN... . sure, higher fico scores will make a huge difference. And I think you are trying to be politically correct/polite in not sharing your true thoughts about the builders incentives and such, and what this could actually mean to the borrower for using the builders lender.  So we will just stop there.. ;o)  Because in many cases, is it the better choice for the borrower?  Do they get roped into using the builders lender just because of these incentives?  Who actually comes out with the better deal?  thanks

CHRISTOPHER... . there are many reasons for why some loans are better than others. But you need someone that will actually break it down correctly.  thanks for the compliment.

LISA.... . so you prefer charts and pictures... ;o)  So do I, as long as their is an explanation involved.  Thanks for stopping by.

GABE... . my pleasure and as usual, thanks for your support.

GITA... . my pleasure and please don't hesitate to pass this along to your potential buyers. And thank you very much for that referral yesterday.  thanks

 

Feb 03, 2010 03:27 AM #12
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Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

 

Please read this series on FHA Loans on how to save money & use your money wisely.

 

  • FHA loans vs Concentional loans - Don't be cash poor!! - Part 2 of 3 - 01-29-10 I want to show even a bigger difference if you put less down. And even if you decided to put less than 10% down, because cash is king now. You can't predict even next week. And keeping in mind of some misleading rumors, that you need more than 10% down to buy a house.

 

Feb 03, 2010 03:27 AM #13
Rainmaker
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John Pusa
Berkshire Hathaway Home Services Crest - Glendale, CA
Your All Time Realtor With Exceptional Service

Jeff - It started in the fall of 2007, FHA certified out-of-work subprime mortgage brokers; they aggressively approved FHA mortgage insurance to unqualified borrowers, and the majority of those mortgages will default. The people responsible monitoring the FHA mortgages were not knowledgeable in the mortgage business.

Feb 14, 2010 03:00 AM #15
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Tim Lorenz
TIM LORENZ - Elite Home Sales Team - Mission Viejo, CA
949 874-2247

I find this to be a very interesting piece on lending.

May 30, 2012 11:05 AM #16
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