Over the recent weeks I have spoken with mutiple individuals with a 620-639 fico asking should we go FHA or conventional?
In this scenerio I would recomend, well that depends.
Heres why:
These clients have found a home to purchase and have enough money for a 95% loan.(I use this as it is the maximum on a conventional product).
Loan 1(conventional) 30 year fixed(with 620 fico)
Interest Rate= 6.5% (interest rate is high due to risk based pricing now in effect on conventional)
Principal & Interest= 1264.14
PMI= 129.34
Total= 1393.48
Loan 2(FHA) 30 year Fixed(with 620 fico)
Interest Rate= 6%
Principal & Interest= 1217.09
FHA monthly mortgage insurance= 82.87
Total= 1299.86
On a monthly payment basis, it looks like FHA is the way to go. However it is important to point out that when doing an FHA loan the mortgage insurance is broken up into 2 pieces resulting in a higher mortgage balance.
Heres How:
1.5% of the loan amount is added to the loan balance.(This is known as the upfront MI premium for FHA). To be clear it does not come out of the borrowers funds, rather is added to the mortgage amount.
Example: The above mentioned loan for 200K would now have a balance owed of 203,000.00(this is reflected in the loan calculations). The other .5% is the monthly mortgage insurance Amount.
With the extra 3000.00 added to the balance, the borrower needs to be in the home for 32 months to break even with Loan 1 scenerio and start saving money.
Now after all the number stuff in this scenerio, the question to ask the client is:
How long do you plan on staying in this home?
2 years and under go conventional
3 years and over go FHA
It is also important to mention, that as loan to value goes down and/or credit score goes up the conventional 30 year fixed becomes more attractive than the FHA 30 year fixed.
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