FHA loans have become very popular in the last 2 years and there are several reasons for this. What I hate hearing is that FHA mortgages have taken the spot of the subprime loans. This is not true at all. This statement is from those that are inexperienced in both the mortgage and the real estate industries. To many subprime loans should have gone FHA and that is just a fact. 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...
In today's market, I am still hearing that if you have 20% down, that you are best using a conventional loan. But so many fail to realize that if you have credit score less than 680, that there are some major pricing hits. It's very sad when your loan officer doesn't even understand this and doesn't take the time to evaluate what the better loan is for their client. Even with 10% to 20% down and credit scores less than 680, FHA loans in many cases will be the best mortgage for you.
The example below is based on a $275,000 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 639. 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 580 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? ***
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 3/4 of a point on the conventional side because of the pricing hit for the fico score.
GOALS – Important :
**So IMPORTANT - your loan officer should always be asking your goals. For 3 years, 5 years, and 10 years. Yes, we all don't have crystal balls, but in many cases you should have an idea and a plan. As you can see, on paper, it looks like the conventional loan would be cheaper. But some important things to know. It cost the conventional borrower an extra $825 upfront, so that $33.18 saved a month actually doesn't truly start until the 25th year. In 5 years on all FHA loans, if you put 20% or more down, the FHA mortgage insurance falls off automatically. So after payment 60, you will now be saving $58.49 more a month on the FHA loan. And as you can see, in 5 years on the FHA loan, you shaved off $2,200 more on the principal based on the upfront MIP of $4,950 that was added to the loan. So as you can see, goals are very important. If you were to put even 15% down in the scenario above, FHA loans would be much cheaper right away.
For more FHA loans vs conventional loans comparisons :
- FHA loans vs Conventional loans - A true numbers comparison with 5% down - 12-20-08 -Using a 710 credit score
- FHA loans vs Conventional loans - A real comparison with 5% down - 11-15-08 - Using a 659 credit score
- FHA Loans vs Conventional Loans - 20% down - A Rude Reality Check - 04-03-09 - Would you believe that FHA loans could be cheaper even with 20% down? Come see why and how.
- FHA Loans vs Conventional Loans - 5% - 4 comparisons that you need to know - 05-02-09 -Comparing a FHA loan against 3 types of conventional loans with different types of monthly mortgage insurance. Guess who won while still using a 679 credit score.....
- FHA loans vs Conventional loans - Knowing the true comparisons - 07-10-09 - A great comparison with a 679 credit score and 5% down. This example will still show that even with a better than average credit score, that FHA loans are still better in many cases.
- FHA loans vs Conventional loans - Things you need to know with 10% down, especially in regards to Condos - 09-19-09 -
- FHA loans vs Conventional loans - Even with 20% down, FHA loans could be better - 05-23-10 - Knowing your goals are very important and this should be talked about, even if putting 20% down.
- FHA loans vs conventional loans - Why FHA home loans in New Jersey can be better with 5% down - 07-11-10 - There is a huge savings by using FHA loans with a credit score of 679 and 5% down.
Donw Payment Series - A Must Read -
- FHA loans vs Conventional loans - A real comparison with 20% down - Part 1 of 3 - 01-28-10 - Not much of a difference, unless you stay in the house for more than 5 years. Hence why a loan officer should be talking about your goals. So very important, yet many dont ask.
- 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.
- FHA loans vs Conventional loans - Get a bang for your buck - Large down payments aren't always the best way - Part 3 of 3 - 02-01-10 - Some great examples of having cash left over and not really affecting your monthly mortgage payment. And that you will have cash left over for emergencies. Keeping in mind that cash is king.
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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!
Copyright © 2010 by Jeff Belonger of Infinity Home Mortgage Company, Inc