Can I get a mortgage with less than 5% down and credit scores of 640? Yes, with a FHA loan you can and it would be cheaper than with a conventional mortgage.
There are still rumors that FHA loans are more expensive. This is a very bad assumption and in many cases, this is not true. It all comes down to credit scores and your down payment. You need a true mortgage professional to properly break it down for you.
FHA loans make up about a 33 percent market share of all mortgages in the last 12 months. One reason why some state that FHA loans are more expensive is because of the new mortgage insurance changes that took place back in October of 2010. As I will show in my example below, these kinds of statements can be misleading until properly broken down.
The example below is based on a $250,000 purchase price with 10% down. One reason why conventional rates are a little higher and more costly in this scenario as in FHA ratesis 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 credit score that I am going to use is 699 and I will still show in this example that FHA loans are cheaper (depending on your goals), even with 10% down.
***And keep in mind, some lenders have penalties on FHA mortgages with credit scores under 640 or can’t do them period. And 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 with the same lender fees, 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 699 credit score, hence why the interest rate is much higher. And in this scenario, the FHA loan scenario is 1 point better, which means that the costs would be $2,250 cheaper.
One main fact is that you will be adding $2,250 onto your principal balance if you did the FHA mortgage because of the FHA one-time mortgage insurance premium. But as you can see, in 5 years, the principal balance is only off by $593.
Simple math. You are saving $35 a month and put an extra $2,250 in your pocket with the FHA loan. This is why you need to know your short and long term goals, and to have a budget in mind, prior to buying a home. To learn more about this, please read : How much can I afford.
Another thought? You still need to be approved by the mortgage insurance company regarding your conventional loan. And if you wanted to put less down, you would need higher credit scores. With a FHA loan, the guidelines state that you can put 3.5 percent down with a credit score of 580. But again, it’s up to the lender and their overlays. And most of all, this scenario is with 10 percent down and a 699 credit score. It gets much better regarding FHA loans if you are putting less down and or your credit scores are lower.
FHA Myth – A common myth is that some will say that FHA loans are more expensive because of the Upfront Mortgage Insurance. Because in this scenario, you are adding $2,250 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. It starts with the borrowers goals.
Reminder : The conventional pricing hits will change for the worst effective April 1st, 2011. Pricing hits for conventional loans in April 2011
- FHA Loans vs Conventional Loans – Comparing 10 & 5 percent down – Part 2 of 2 – Cash is King