Many of my clients come to me pre-approved as an FHA buyer for one reason or another; bad credit, little money saved, past bankruptcy or short sale, etc.
In fact, the majority of home buyers today use the FHA loan. But are they aware of the costs to them in choosing this loan over a conventional loan.
What is an FHA loan anyways? Well, for more than 80 years, the Federal Housing Administration has tried to help home buyers purchase their home by offering loans that are easier to qualify for and require a small down payment, as low as 3.5%. It has appeared to be a good deal. But that may no longer be the case.
Congress has required FHA to keep a cash balance equal to at least 2% of all outstanding loans in its mortgage insurance funds. But due to a bunch of bad loans taken on during the housing issues, the agency did not meet its goals.
This forced the prices to go up for FHA borrowers. The cost of mortgage insurance rose substantially. What's worse, is that mortgage insurance is no longer something that drops off the loan. In other words, as a FHA borrower, you will pay Mortgage Insurance for the life of the loan. (A conventional loan pays mortgage insurance for only 8 years).
To give you some idea of the cost to you, lets compare. 
FHA loan 3.5% interest rate (3.5% down payment)
- $300,000 purchase price of home
- Downpayment = $10,500 plus closing costs
- (1.75% upfront mortgage insurance cost)
- P & I (Principal & Interest) $1322 / per month
- MI (Mortgage insurance) $313 / per month lifetime of loan
- Taxes + Insurance = $400.00 / per month
- Total payments = $2035.00 per month
Total payments over 30 years (not counting taxes and insurance) $588,600
Conventional loan 3.75% interest rate (5% down payment)
- $300,000 purchase price of home
- Downpayment = $15,000 plus closing costs
- P & I (Principal & Interest) $1320 / per month
- MI (Mortgage insurance) $159 / per month (est. 8 years)
- Taxes + Insurance = $400.00 / per month
- Total payments = $1879.00 per month
Total payments over 30 years (not counting taxes and insurance) $490,464
So as you see, its not always in your best interest to go FHA. Over the life of the loan, you save almost 100,000 by waiting, saving, and going conventional instead of FHA.
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