FHA loans vs Conventional loans - Don't be cash poor!! - Part 2 of 3

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fha loans vs conventional loansFHA loans have been used more in recent years. Many have talked negatively about FHA loans because of their high default rates as of lately. Don't be fooled by chatter that is not backed up by fact and why this is happening.  Please read : Should we ABOLISH FHA loans?

One of the main myths that I wanted to dispell in this blog post is that you don't need 20% to buy a home in today's real estate market or that you need a 720 credit score. These are bad myths and rumors. You can read about it here : Credit scores/FICO scores - I need a 700 credit score?

Yesterday, I wrote a post about comparing a FHA mortgage to a Conventional mortgage with 20% down. FHA loans vs Conventional loans - A real comparison with 20% down. - Overall, it all comes down to the borrowers needs and goals. Yet not all loan officers dig this deeply. Usually because the focus is lost when the borrower wants to know the mortgage interest rate and fees. More on that in a post on Sunday.




Please read these links before moving forward (the next 3) : It’s extremely important


Please read this question about why my conventional rates are so much higher :  Someone's question to why my conventional rates are so high.

My response : Just a basic response to why the conventional rates are much higher.

And proof that it's not just me.. all lenders need and have to follow the same pricing hits. Conventional PRICING HITS



What is the big fuss of putting 20% down other than you don't have mortgage insurance? Here is my chart from yesterday.


Loan comparison of 20% down between FHA loans and Conventional loans


fha loans vs conventional loans












In regards to scenario #1, this is great if you have 20% down. But is it? Please read why going with a conventional loan with 20% down still might not be your best option. 20% down comparison between FHA loans and Conventional Loans   Hint: Goals



Dropping the down payment by 1%, making it 19% down and not 20% down.

Scenario # 2

fha loans vs conventional loans












Scenario # 2 - There is no large difference except that your monthly mortgage payment is lower on a FHA loan when putting less than 20% down. **Conventional mortgage insurance is not standard as it use to be. Meaning that these figures could change depending on the insurance company, the fico score, and in some cases, where you purchase the property.**



Loan comparison of 10% down between FHA loans and Conventional loans

Scenario # 3

fha loans vs conventional loans












As you can see, when you put less than 20% down, and depending on your credit scores, FHA mortgages will be much cheaper in the monthly mortgage payment. I give a better description and understanding of the differences in this blog post : 10% down comparison and understanding the upfront mortgage insurance on FHA loans vs conventional loans.

My whole point to this post though is about cash, cash savings, and reserves. And in today's economy, cash is king. Let's look at it this way.



Loan comparison – Conventional loan w/20% down vs FHA loan w/10% down

conventional loan w/20% down vs FHA loan w/10% down
















Overall, there is no true correct answer. It first must come down to how comfortable you are in your finances. But here is a clear indication that just because you put down 10% more, which is an additional $30,000, doesn't mean your payment drops as signficantly as many of you might think. (this will vary depending on loan amounts) Don't get me wrong, saving an additional $186.71 a month can be huge. But at the same time, you could keep $30,000 in your pocket instead. If you want to try and compare apples to apples, just take the difference out of the monies that you saved from your 10% down payment. Set aside $11,200 in a seperate account to lower your payment. It would still leave you with $18,794 now, after closing

One word of advice.... you don't have to try and pay down your mortgage as soon as possible.  Yes, this is a good security blanket for so many. But you also don't know what the future holds for you.  Besides, you could take $10,000 of your money left over and invest it in several areas that would give you a better return of 7% to 8%, especially since you are paying 5% on your mortgage. But you would need to speak to a financial consultant about this.



Summary : No matter how much cash you have or don't have, this is how your loan officer should help you understand your mortgage and financial situation. Cash can be king and be useful in unknown emergencies. Don't always fall for those commercials that scream, "don't let the banks rip you off, learn how to pay off your mortgage quickly".(you don't need these programs, such as the mortgage accelerator programs... you can do this on your own)

On another note, I am not saying that your loan officer needs to show you this exact breakdown. But it's more than just about the best interest rate and or fees. What is the best program for you based on your goals and the mortgage program. I will be talking about this over the weekend. Stay tuned. 

Knowledge is Power... And don't forget that you can still put down 3.5% with FHA loans, as opposed to conventional loans needing 5% to 10% down.



Disclaimer :  The rates are examples in today's market, aren't any form of advertising, and aren't for solicitation of new business. It's merely to educate the consumer. And the spread shown in these examples are real as in the profit margins for both sides, in order to compare apples to apples. The conventional rate also includes the penalty for the 659 credit score and down payments. This is because of the large pricing penalty for the credit score.




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!




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

Comments (38)

Gene Riemenschneider
Home Point Real Estate - Brentwood, CA
Turning Houses into Homes

It is nice if you can pay cash or go 20% down, but it is a good idea to have a nice reserve, even if you end up paying a little more on the loan.

Jan 30, 2010 08:51 AM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans


JAYNE.... . wow, well, thank you very much. I just love putting numbers together such as what I did above. Sure, there are several ways that you can look at this and argue why you should put 20% down. But my argument is that many loan officers don't go into the details, to allow their borrower the ability in making a sound decision. Just my opinion on that.  And yes, we all need to pitch in and educate borrowers and other real estate agents on FHA, the pros and cons... and to dispel those myths.  In any case, thanks for the polite compliments.

TIM... .  thanks.. it's always great to hear from a fellow loan officer that actually agrees and understands your post.  And yes, there are even more add-ons on conventional loans with other types of properties and or when it came to types of loans.  Just as a conventional cash-out... thanks for your input, for the polite compliment, and for the heads up in regards to my misspelling in the subject.  thanks


CATHERINE.... . so based on your comment, I have a question for your. Are you saying that the borrower should do a 5% conventional loan just because it's easier, even when buying that property? Even if it could cost them more money in the long run?  Just food for thought... because here is a semi myth... or an example of the lenders that helped your clients. When there was weather related repairs, they had a grace period until the weather warranted the repair.  Sure, many lenders did not exercise this or explain this to the borrower or even the realtors.   But here is my problem.. this is part of the reason to why we are in the mess that we are in today, because many loan officers did the same to their clients, giving them a subprime loan and or a conventional loan, just because it was easier, even though it cost the borrower more money in the long run. I do appreciate your comment and your feedback. This was not an attack, but just making a strong point, because I hear this often, more than I should hear about.

PS... my whole point to other lenders... you could have such repairs held in escrow, especially when common sense says that paint won't hold well when it's below a certain temperature. I blame part of your story to those loan officers and lenders that either were lazy or didn't know any better... yet also to some realtors that went along with it, even if it wasn't in the borrowers best interest.  Read some of my blog posts on 5% down comparisons... this will show you how much more this could cost the borrower, even with high credit scores.. thanks


Jan 30, 2010 08:52 AM

Catherine, welcome to the real estate industry these days! So what if it didn't close on time? Who was the one to schedule the closing anyway? You? You'd rather have your buyers go through a conventional loan program so they can get to closing faster despite the safety concerns than have them go through the FHA program?

Jeff, do you also do USDA loans? I find them to be a much better product than FHA, and they don't come with the high delinquency rate that FHA loans do.

Jan 30, 2010 11:35 AM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans


GENE... it's always nice to have extra cash. I think many think if you put 10% more down, that you will save a lot more monthly. Not always, or always as much. But it does depend on the loan amount also.. thanks

ANDREA.... .  I do all loans, even USDA loans...  but you can't compare USDA because of two main reasons... they only fit certain geographical areas and that there is an income cap. And here is my argument to why FHA loans have such a higher delinquency rate. Please read : Should we ABOLISH FHA loans?  thanks


Jan 30, 2010 11:40 AM

Well, in my area of the world, we can offer USDA loans for almost anywhere in our state because it's so rural, so USDA tends to be the better option for our clients. Plus, we rarely ever come across borrowers who are over the income cap. But it seems realtors are so stuck on telling their clients they need to go FHA even though it's not the best option. I've even met a few LOs who can offer USDA but don't even bring it up because they haven't taken the time to learn the guidelines.

Jan 30, 2010 11:48 AM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

ANDREA.... get a chance, read the blog that I listed above in my comment to you, titled... should we abolish FHA loans. My same argument even goes for FHA loans, that many loan officers, especially when we had subprime loans, took borrowers the conventional or subprime way because it was easier for the loan officer... or in some cases, because they didn't know FHA guidelines. I even know this first hand, because I heard loan officers on the phone and that I would question them. Wow, some of the answers that I received.  Same as you mentioned about USDA loans. What state do you work in? To be able to do USDA loans almost anywhere in your state, would be a great problem for me to have, because then I could give all options.


Jan 30, 2010 12:02 PM

I did read it :)

Speaking of LOs not knowing guidelines, I lost a client to a lender out-of-state who specializes in VA loans. The realtor called me asking about guidelines, and she said the VA lender told her that the buyer could only ask for 3% sellers help. I've told the buyers how wrong this LO is, but they refuse to come back to me even though I'm local and knowledgeable... and my rate is better!!!

Oh, I'm in Delaware.

Jan 30, 2010 12:11 PM
Eric Bouler
Gardner Realtors, Licensed in La. - New Orleans, LA
Listening to your Needs

Lots of good info for realtors. Keep up the good work!

Jan 30, 2010 02:43 PM
Karen Rittenhouse
www.JKKPropertyInvestors.com - Greensboro, NC
Real Estate Investor

Good comparison.  Very helpful.

I'm just happy with any loan that a buyer can get to closing with!

Jan 30, 2010 03:03 PM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans


ANDREA... . comment # 26 ... . especially since you were better in rate and in-state.  Did the person at least tell you why they were still going with the other person?  I will say this... I even showed a client that the lender originally lied and bait & switched them.. and that I was still lower after it was all said and done.. but some people's thinking and or loyalty is ass backwards. This borrower said.. well, they have been working on my loan, so I am going to stay with them,,, wow.. sad... 

On another note, are you a member of Active Rain?  If so, what is your profile under and if not, send me an e-mail.  My e-mail link is up top on the right and or on my profile page.  thanks


ERIC... .  thanks for the kind words.. but not only for realtors,but most of all, for the borrower. ;o)


KAREN... . thanks for the compliment... but I will say one thing about your comment here..."I'm just happy with any loan that a buyer can get to closing with!"

In my opinion, that is not the best way to look at things... I know of many loan officers that used that same line of thinking and would put borrowers in loans that were easier for the loan officer, yet were more expensive in the long run for the borrower. I am just trying to make a point in regards to that.. thanks


Jan 31, 2010 04:14 AM
Gary Miljour
American Financial Network, Inc. NMLS#207208 - Southern Pines, NC
Mortgage Originator NMLS Licensed in AZ and NC

Jeff, Great Post!

Catherine re your comment on #19

"The easier loan is the convention because the appraisers here were making my buyer paint basement windows in 20 below wind chills to close the next day and then not closing on time--the conventional loan almost never has any work orders called and we have them with 5 % down.  Thanks for the info."

I understand Conventional loans can sometimes be easier to do, but for who? 

Realtors all need to be careful now on how we approach the consumer about giving professional advise on mortgage loans.  I would highly recommend all licensed real estate agents to stay clear of giving any advice when is comes to the mortgage.  As of January 1, 2010 in some states thru July 1, 2010 in other states like mine (AZ) loan originators all need to have an origination license (unless they fall under the Arizona statue exemption 6-991.01.  With this license comes a lot of new responsibilities, rules and laws.  Depending on your state laws, a non-licensed loan originator may not be wanting to give out this information. 

For example:  Let me read one statue straight from the Arizona Mortgage law 6-991.08  "A loan originator shall make reasonable efforts to secure a loan that is reasonably advantageous to the borrower considering all of the circumstances, including interest rates, charges and repayment terms of the loan"

What this basically means is that when a client comes to me for a mortgage loan, I need to research based on my clients specific needs the best loan option available.  In your comment above if the FHA option was better for your client because 3.5% down was far more advantageous than 5.00% down, then in Arizona, a law might have been broken.  Again I am not an attorney nor am I giving any legal advice, I am just trying to make a point of how the laws have changed.   

I cannot stress enough now to all Real Estate agents that giving advice to your client about mortgages might mean you are breaking the law.  

Jan 31, 2010 11:35 AM


I own a mortgage company here in DC and agree FHA is only option when you have those low fico scores. I'm really surprised to here this many LO's not understanding FHA in this environment. These will not be the LO's that succeed when rates go higher as they clearly don't understand the business.

FHA makes up now almost 40% of all originations due to the wide credit standards and low down payment. This is why there will be significant changes to FHA coming as they are going to post huge losses this year. FHA was never intended to be used this widespread but since there literally are no other options for less down payment that's what you're going to get.

Obviously were in a much higher cost area so FHA goes to 729k so that takes into account a lot of people but that's not the norm. FHA needs to up its down payment limit to a least 5% and should be 7% with tighter credit  standards. I've done loans in 2009 with a 59 back end ratio with fha that's crazy. (buyer made more money just couldn't show it)

I know the realtors want to keep downpayments low but we need to look at the big picture. Not everyone should own a home as many in government think. We can't keep creating 50 and 100 billion dollars out of thin air to pay for these deficits with Gov't loans and the GSE's. We need to get some discipline and FHA is going to be the first place to start given its size in the originations market place.

Do we abolish it...HECK NO! but we do need to restructure it.

To your example if you compare 720 scores you'll see conventional makes a lot more sense especially when you add in the funding fee into the mix. It's great to have cash but look at the MI cost of capital vs the downpayment you'd need to be making 8% or more on your money which in this day and age isn't easy.

It's all about customer needs and goals. Any good LO should be able talk to a client and understand there needs then match that to the right program.

Very enlightening post and also to see the lack of qualified LO's still in this business is discouraging but that may not last much longer.


Jan 31, 2010 11:42 PM
Cari Anderson
Danville, CA

Jeff:  Excellent analysis on the breakdown between FHA and conventional programs.  FHA has so much flexibility in this market.  I wholeheartedly agree that cash is king and the consumer needs to "crunch the numbers" and see if it is actually in their best interest to put a majority of their ready cash into the purchase.  Every situation is different but it is our job to show all of the alternatives and let them select what is in their best interest.  Even though we do not have the 100's of programs today that we used to have their is certainly enough to give the homeowner choices in their largest debt. ~Doug

Feb 01, 2010 02:37 AM
Lyn Sims
Schaumburg, IL
Real Estate Broker Retired

Great examples on how each buyer has to decide which loan is best for them. As you say, their loan office should be able to provide this info to buyers.  You always do it in such a great way though!  As usual Jeff, great FHA loan advice.

Feb 01, 2010 09:55 AM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans


GARY... . thank you very much for that polite compliment.  And you hit the nail on the head, in regards to who should be giving what advice and quoting specific mortgage programs and interest rates.. thanks  For any of you that have missed this, Gary Miljour wrote about this in here and is doing a series on this.

Please read : Mortgage Originating Licensing - It's not advice, it's the law


WESLEY.... . you bring up an excellent point that not as many loan officers truly understand what FHA's are about, especially in this environment. And yes, many of these LO's will not be around down the road. But worst of all, I think it comes down to basic math and how you should ask your clients their goals and how to compare the differences. I explained some more of this in my part 3. Overall, thanks for your kind and detailed compliment and comment.

CARI & DOUG... . Doug, we never really needed the 100's of mortgage programs. We got greedy and we are paying a high price for that greed. But it's not even the consumer crunching these numbers, but the loan officer that understands all of this. Thanks for the compliment.

LYN... . yes, the loan officer should be able too know and understand these comparisons.. and to supply them to the borrower. Maybe not in this fashion and or in this kind of detail. But knowing what to tell the borrower and why is my main issue and concern. And thank you very much for such a very kind compliment.


Feb 03, 2010 03:35 AM
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 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.


Feb 03, 2010 03:36 AM
Matt Robinson
Professional Investors Guild - Pensacola, FL

How about don't be overleveraged and waste money on mortgage insurance?  Too much mortgage is what got so many people in trouble when the market went down.  I don't think encouraging people to put less down is the best thing for this market.  When my grandparents bought their home, they put 50% down and paid it off in 15 years and I don't remember any "foreclosure crisis" from 1940-2005. 

Feb 07, 2010 10:53 AM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans


MATT... as much as I appreciate your comment and respect your opinion, I basically couldn't disagree with you more on 2 major things that you brought up.

First off....  for most of what you mentioned in regards to the years, from 1940 to 2005...  we have truly never experienced this kind of economy with unemployment up to 10%... and for a few good years, that it was around 8% to 8.5%. Just this alone, for the fact that many more would be out of work, would create more foreclosures. Sure, we can argue the fact that there have been some that have walked away from their house because they had no equity... and these same people could have paid for their mortgage payments still.  But I also knew a few personally that had put down 20% 2 years ago, when they bought their house, and ran into financial difficulties and have lost their house. 

In regards to your comment about wasting money on mortgage insurance?  Okay, so if we made it mandatory for everyone to put 20% down or more, the real estate economy would be DEAD.  Secondly, if that happened, the U.S. would fall apart and become broke. Now, all of this is my opinion. But even if you have 20% to put down on your home, there is more to it than that.  Do they have 4 times that amount left over in their bank account or in liquid-able assets?  And even so... I will still say that I would recommend for someone to put less down. If you want to get technical, I know of some really good financial planners that could get you a better return than what you are paying on a mortgage at 5% and even 6%.

Lastly, on top of that comment, that I shouldn't be advising people this, you can't predict the future... a lot of what ifs and uncertainties out there. I would rather my client be safe and understand the money, than to liquidate what they have and maybe be cash poor. Your statements are very general in my opinion, without using examples.  Such as... sure, I would put 20% down if I was buying a $300,000 house and that I had 1 million dollars in specific accounts. Sure, I didn't go into detail about this, but I did talk about investing some of your left over money.... the average person doesn't have a large savings... when your grandparents and even my parents first bought, times were much different.  You can't even respectively compare 4 years ago to now, so why 30 years ago?  Or 50 years ago?  Just my opinion and thanks for your feedback.


Feb 07, 2010 11:30 AM
Gary Miljour
American Financial Network, Inc. NMLS#207208 - Southern Pines, NC
Mortgage Originator NMLS Licensed in AZ and NC


This comment is directed back to Matt on comment #36.

Matt,  I have one question to ask.  In 2006 if every homeowner had the ability to put 20% down are you saying that they would still have equity in their home and we would of avoided this financial situation?  As a mortgage lender who has been around awhile, I saw a ton of clients put 20-30% down and guess what, they have no equity today in their house.  So would the money of been better protected by it sitting in a bank today or in a home that has dropped in value?  Because truly the amount a borrower puts down has little effect on a foreclosure.  We have high foreclosures because banks were taking on too much risk on mariginals borrowers who should of never been given the loan in the first place.  You compound that with high unemployment and we have our situation we are in today.   

Feb 07, 2010 11:24 PM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans


GARY... .  thanks for your input.  I want to add a little to what you had stated... nice job of bringing up the loss of equity after putting 20% down.  I kind of missed bringing this up because I got carried away with some other issues. But as you know, I have written about that part several times.  thanks


MATT.... .  I want to make one thing clear.  We all have opinions and such. You apparently have a different opinion than what Gary, myself, and many others in these comments have. I am not replying back to be negative or bitter to you.  One of the mean reasons why I love blogging is that I can express my insight and opinions, and also to teach others about the financing side of things.

In my last comment, I got carried away with a few things and forgot one of the more important things on hand that Gary brought up.  What about those that did put 20% down and lost 30% to 40% equity in their home after the fact?  What do they have now?  I will say this, you can not use even 5 or 10 years ago in your comment and try to compare apples to apples.

Gary also brought up another point, about some mortgage programs made it easy. I will agree with your argument that lending was easy for some... but that was the subprime market and some Fannie Mae loans such as the 100% loan that allowed some borrowers to go as high as 55% for the debt-to-income ratios on their back end qualifying ratios.  First off, that is very high, especially on 100% financing.  But you know what, you can blame the gov't for this.  President Clinton was the one that pushed Fannie Mae & Freddie Mac to make home financing more affordable and all of that is recorded as fact.

Overall, one more point that I wanted to make..  you try and make an argument for more money down.  What about such programs as the FHA loan,the USDA loan, and the VA loan that allows for little to no down payments. The USDA loan & VA loans allow for a borrower to put no money down.  ALl 3 loans mentioned had a small default rate / foreclosure rate up until the last 3 years.  And the reason why FHA is much higher now is because more people are using FHA loans, since the subprime market disappeared and because the 100% Fannie Mae programs have dropped off.  Please read this post :

Should we ABOLISH FHA loans?



Feb 08, 2010 12:30 AM