FHA loans have been one of the main focal points in today's real estate transactions. Two main reasons for this is that it comes to the down payment and the credit scores. In the past, some loan officers were using other types of financing that were easier for them, but not suited best for the borrower. What I do hate hearing is that FHA mortgages have taken the spot of the subprime loans. This is not true at all. This statement is very misleading. 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... Even with 10% down and credit scores less than 680, FHA mortgages in many cases will be the best mortgage for you.
As I have stated many times, a lot of it comes down to your goals, when determining what mortgage would be better for that specific borrower.
Just about a month ago, FHA got it's approval to increase the monthly mortgage insurance while decreasing the upfront mortgage insurance. Many thought that this would make FHA loans more even with conventional loans. Please read : FHA mortgages new mortgage insurance changes - One main factor not mentioned when most people bring this topic up is that it's still hard in many cases to get mortgage insurance on a conventional loan if your credit scores are under 680. You also need to be careful of the rumors circulating around FHA loans regarding the new monthly mortagge insurance changes.
The example below is based on a $250,000 purchase price with 5% 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 5% down and the new increase in monthly mortgage insurance.
***And keep in mind, some lenders have penalties on FHA mortgages with credit scores under 660 or can't do them. 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? ***
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. The conventional rate also includes the penalty for the 659 credit score, hence why the interest rate is much higher.
Some of you might be saying that you will be adding $2,375 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 $5,629 in payments. Subtract the Upfront Mortgage Insurance premium from the monies saved in 5 years and you have saved a difference of $3,254!!! 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 5.00% rate. Just something else to remember, but consult your tax consultant or CPA. And as I showed above, you would have reduced your principal balance by $4,508 more in 5 years on the FHA loan scenario.
IMPORTANT REMINDER : Mortgage Insurance on conventional loans can be harder to obtain nowadays. The scenario above could only be done by some mortgage insurance companies if your credit score was a 680 or above. The monthly mortgage payment reflected above for the conventional scenario would be this exact monthly payment for a credit score of 680.
FHA Myth - Some people, including loan officers, without doing the math, will say that FHA loans are more expensive because of the Upfront Mortgage Insurance. Because in this scenario, you are adding $2,375 to the FHA loan and because of the new monthly mortgage insurance change. This kind of mortgage myth needs to be squashed on all levels.
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!
For information about FHA myths & FHA rumors, please read : FHA Myths & Rumors
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