Making a statement that FHA loans are more expensive than conventional loans because of the monthly mortgage insurance is a blind statement. This is like saying that your house is better than your neighbors house. Just to many unknown variables to make this kind of determination.
Here is what a realtor on Trulia stated the other day....
"While an FHA loan has many benefits, the downside(aside from some hefty mortgage insurance) is meeting the guidelines. If you can put 5% down, there is a conventional lender that can do the loan(and the Mortgage insurance is actually lower)."
Two major issues with that whole statement. There are to many factors when determining mortgage insurance for conventional loans and conventional loans are black and white. If the AUS (automated underwriting system) says no, then it's no. At least with FHA loans, you can manually underwrite them.
The basics with FHA monthly mortgage insurance (MMI) : (this could possibly change in the near future)
- LTV(loan-to-value) > 95% = .55 basis points Ex. $200,000 loan amount, the MMI would be $91.67/month
- LTV(loan-to-value) = or
** Keep in mind, the credit score is irrelevant, and does not affect the monthly percentages for FHA loans.**
The basics with conventional monthly mortgage insurance :
- LTV > 90.01% to 95.00% = .78 basis points (best case scenario and will explain below) On a $200,000 loan, the monthly mortgage insurance would be $130.00/month
Now, keep in mind, I said best case. Mortgage insurance for conventional loans have changed drastically in the last 2 years. The mortgage insurance companies have added new guidelines based on LTV, credit scores, and if the property is in a declining market. If in a declining market, you would need credit scores above 740 just to be able to put 5% down. The other issue is the credit scores. The lower the scores, the higher the percentage of the mortgage insurance. Some even have cut offs that are higher than the normal cut off of 620 that most lenders have. In regards to FHA loans, it doesn't matter if you have a 620 or a 700, when it comes to the monthly mortgage insurance.
Another issue is the mortgage interest rates when comparing FHA loans to conventional loans.
Most lenders only have a slight penalty for FHA mortgages with credit scores of 620-640. This pricing hit is normally a quarter point. On $200,000, that is $500.
On a conventional loan with 5% down, these pricing hits can be as high as 2.75 extra points with credit scores ranging from 620-639. On $200,000, that is $5,500. Even with a credit score of 719, the pricing hit is a half point.
Summary : There are some many ways to look at this, hence why it's imperative not to really listen to anyone but a loan officer. But most of all, you want to listen to a very qualified loan officer that knows how to dissect all of this information properly.
Yes, some will argue still that I forgot about the upfront mortgage insurance on FHA loans in New Jersey and that is another reason why FHA mortgages are more expensive. Well, I have proven that wrong with this post by comparing both a FHA loan vs a conventional loan with 5% down and by using an above credit score of 679. I am including both the upfront mortgage insurance and the monthly insurance. Please read :
As shown in this example, you are still saving $200 a month with the FHA loan. The proof is in the pudding.
Important Note : When doing a conventional loan with mortgage insurance, you have a a seperate underwriter from the MI company that needs to underwrite the loan also. On FHA mortgages, you just have one underwriter for the whole file.
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For important mortgage insight to watch for, please read : Consumers need to be aware of these Red Flags!
For information about FHA myths & FHA rumors, please read : FHA Myths & Rumors
Copyright © 2010 by Jeff Belonger of Infinity Home Mortgage Company, Inc