Comparing FHA loans and Conventional loans with 5 percent down – What is the best fit?

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FHA loans


What is the best fit when comparing FHA loans and conventional loans?


Based on my opinion over the years, the loan officer should focus on your credit scores and down payment that you can afford, when comparing mortgage programs. But keep in mind, the main focus should be what you can afford regarding your monthly mortgage payment. Overall, one needs to understand how mortgage insurance works and the guidelines for mortgage insurance in order to put you into the best mortgage program for your situation.

FHA loans in many areas make up about 35 percent to 50  percent of all mortgages used in the last 12 months for many reasons. And there are still some FHA rumors that state FHA loans are more expensive because of the upfront mortgage insurance or because of the new FHA monthly mortgage insurance changes that just took place April 18th, 2011, hence why I wanted to share this comparison.



No matter what mortgage you choose, you don’t need 700 credit scores or 20 percent down.  But you do need to understand the differences for many reason, hence why I want to show this comparison between FHA loans and Conventional loans.

The example below is based on a $250,000 purchase price with 5 percent down. One reason why conventional rates are a little higher and more costly 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 or 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 5 percent 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 and are more expensive.***


comparing FHA loans and conventional loans

Disclaimer : These rates are examples of today’s pricing with the same lender fees, and the spread shown in the example is 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.


One main fact is 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.  But as you can see, in 5 years, the principal balance is only off by $571.

Simple math. You are saving $69 a month and technically put $3,569 into your pocket in the first 5 years..  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 yes, there are other types of mortgage insurance programs that one could qualify for, but they usually require higher credit scores.  Also, if you wanted to put less down on the conventional loan, you would need higher credit scores. With a FHA loan, the guidelines state that you can put 3 1/2 percent down with a credit score of 580. But again, it’s up to the lender and their overlays.


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. It starts with the borrower’s goals.


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


Re-Blogged 3 times:

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comparing fha loans and conventional loans

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James Lowenstern
Castles Unlimited® - Newton, MA
Castles Unlimited. Newton MA Real Estate

excellent info...I will hold onto it for my agents. thanks.

May 25, 2011 02:26 AM #1
John Saari
Worcester, MA
"The Mortgage Buddy"

Great post Jeff. It's such valuable information for people to know the pros and cons of both products.

May 25, 2011 04:11 AM #2
William J. Archambault, Jr.
The Real Estate Investment Institute - Houston, TX

"the loan officer should focus on your credit scores and down payment that you can afford"

I've heard that before!


May 25, 2011 04:51 AM #3
Barbara-Jo Roberts Berberi, MA, PSA, TRC - Greater Clearwater Florida Residential Real Estate Professional
Charles Rutenberg Realty - Clearwater, FL
Palm Harbor, Dunedin, Clearwater, Safety Harbor

Jeff - Wish you were down here in Florida! This is great information and I am going to reblog it for my clients.

May 29, 2011 03:16 AM #4
Brad Fink , NMLS# 454640
Pre Approval, First Time Buyer, Discount Fixed Rates, VA - Chesterfield, MO
FHA Expert, MHDC 1st Time - Buyer Cash Assistance, LOW LOW Rates!

Hi Jeff,

Great Article. The table comparing the two alternatives is awesome! Expert lenders such as yourself can make a huge difference for homebuyers.

May 30, 2011 01:55 PM #5
Brent Kluge
Senior Vice President, Secured Funding Corporation - Rockville, MD
I do mortgages REALLY well and I WON'T RIP YOU OFF

FANTASTIC break down.  I like it.  Thanks for the breakdown. ;)


Jun 01, 2011 12:25 AM #6
Tim Peterson
Wisconsin Realtor Safety and Concealed Carry Classes - Madison, WI
Realtor Safety Training Classes

Hi Jeff I had clients ask me this last week. They had asked their Bank and are still waiting for an answer--I will direct them to this post--thanks

Jun 02, 2011 01:26 PM #7
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