FHA loans vs Conventional loans - A true numbers comparision with 5% down

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Mortgage and Lending with Social Media - Infinity Home Mortgage Company, Inc

 

fha loans vs conventional loans

FHA loans have been the main source of financing in the last 6 months. What I hate hearing is that they have taken the spot of the subprime loans. This is not true by any part of the imagination. This statement is from those that are inexperienced in both the mortgage and the real estate industries. The realization has been that 30% of the subprime mortgages in the last 5 years previous to the last 2 years should have been FHA mortgages, not subprime. And that is a hard core fact.

The subprime loan for many years could go down to a 500 credit score, depending on your equity position. But your rate was usually higher. If your score was higher, the less you needed to put down, the lower your rate. Sounds good, right?  Wrong, because the subprime rate was usually higher than the FHA rates.

To compound this, so many said just because you had a conventional loan, you had the better loan. This was not always true when putting 3 percent down. In most cases, you were told this, because that particular lender was not FHA approved. Now?  Even with 10% down and credit scores less than 680, FHA loans in many cases, will be the best mortgage for you.

 

 

So you could argue the fact that this is just my opinion, that FHA mortgages in many cases would be better for you. True, even though I have over 16 years of experience as a loan officer in the mortgage industry. But numbers don't lie. Let me show you.....

The example below is based on a $300,000 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.  The FICO (credit score) that I am going to use is 710 and I will still show in this example that FHA loans are cheaper, even with 5% down.  This was a request from Laurie in Portland, Oregon. I wrote a blog about comparisons, but using a credit score of 659. A FHA loan vs Conventional loan comparison with a credit score of 659

 

***And keep in mind, some lenders have penalties on FHA mortgages with credit scores under 620. And many lenders can't do FHA loans under 580. I can still do credit scores down to 500 with a manual underwrite.***

 

Type of Mortgage

Conventional Loans

FHA Loans

Purchase Price

$300,000

$300,000

Mortgage amount w/5% down

$285,000

$289,987 w/MIP

Interest Rate with zero points

6.25%

5.625%

Principal & Interest Payment

$1,754.79

$1,670.24

Mortgage Insurance payment

$185.25

$118.75

Total mortgage payment w/P&I and mortgage insurance

$1,940.04

$1,788.99

Monthly Savings

 

$151.05 per month

Disclaimer :  These rates are examples, but the spread shown in the example is real. To compare this scenario apples to apples, the fees are the same and with zero points. In this scenario, there are no lender fees or points. The conventional rate also includes the penalty for the 720 credit score, which is only a 1/4 pt., not a 1/4 percent.

 

Some of you might be saying that you will be adding $4,897.00 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, which most people sell in a 6 year period, you would have saved $9,063 in payments in 5 years. This is a difference of $4,166 that you have saved!!!   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 6.25% rate. Just something else to remember, but consult your tax consultant or CPA. 

 

 

A Chart for the Money Geeks

Type of Mortgage

Conventional Loans

FHA Loans

Purchase Price

$300,000

$300,000

Mortgage amount w/5% down

$285,000

$289,987 w/MIP

Interest Rate with 1 point

5.00%

5.00%

Principal & Interest Payment

$1,529.94

$1,556.77

Mortgage Insurance Payment

$185.25

$118.75

Total mortgage payment w/P&I and mortgage insurance

$1,715.19

$1,675.52

Monthly Savings

 

$39.67 per month

Disclaimer :  These rates are examples, but the spread shown in the example is real. To compare this scenario apples to apples, the fees are the same and with 1 point. In this scenario, there are no lender fees. The conventional rate also includes the penalty for the 710 credit score, which is only a 1/4 pt., not a 1/4 percent.

 

One of the first questions that a loan officer should ask you is what type of payment that you are comfortable with. That question should shortly then be followed with this... "how much cash do you have to work with or want to work with." The reason being, as you can see in the example above, I was able to buy the rate down with just 1 pt.  And this happens on and off during the course of the year, but some of the spreads between the rates aren't as far apart than you would think.  It use to be a rule of thumb that 3/8 of a point more would drop your rate 1/8 of a percent. A few months ago, in some cases, it was a half of a point to buy the rate down an 1/8 of a percent. As you can see, the apread is nothing at all, especially on the conventional side of things.

A very good loan officer will look at the different spreads.  And if they do their job correctly, they could advise you to pay a little more or try to get a gift to buy the rate down. In this example, it would cost you an additional $2,850 at closing. Another great aspect of FHA loans is that you can get a 100% gift from a family member. In regards to conventional loans, you have to have 5% of your own money into the transaction. And you don't have to prove gifts if you put 20% or more down.

In regards to the scenario above, as you can see, you are only saving $39.67 per month. Sure, you break down the numbers with a fine tooth comb, when talking about interest deductions, MIP write-offs, etc, etc. But the reality of it all is that the average consumer needs the actual cash savings now, not later. So in this scenario, sometimes a few dollars a month now, is better than the fact that you have to add onto your loan amount the FHA MIP monies. In this scenario, it would then take you about 10 years to recoup the Upfront Mortgage Insurance Premium.  But again, not a huge savings, but depending on how you view this, even with a 710 credit and 5% down, your initial payment on a conventional mortgage is going to be more than a FHA loan.

 

 

 

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For more information on FHA loans, please go to this link. The FHA Expert

For more information on how you can obtain your dream home, please click here : Mortgage Financing Options

For important mortgage insight to watch for, please read : Consumers need to be aware of these Red Flags !!!!!


Copyright © 2008 by Jeff Belonger

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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!

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For information about FHA myths & FHA rumors, please read : FHA Myths & Rumors

 

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

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Re-Blogged 2 times:

Re-Blogged By Re-Blogged At
  1. Jim Lee 12/20/2008 04:45 PM
  2. Mirela Monte 01/13/2009 03:14 AM
Topic:
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Location:
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Groups:
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Tags:
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Ambassador
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Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

 

FRED... I have already checked with HUD... when I wrote about this year, it was changed in 2001. You need to go back and read that whole article. I am not talking about the upfront mortgage insurance. I am talking about the monthly mortgage insurance. And sorry, I don't have time to go looking through HUD's web page, but it's out there. Again, I made sure of it when I wrote about this last year. I would need to find that blog. But I am 110% sure.

 

Dec 20, 2008 12:55 PM #14
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Celeste "SALLY" Cheeseman
Liberty Homes - Mililani, HI
(RA) AHWD CRS ePRO OAHU HAWAII REAL ESTATE

Beautiful comparison and as always....good info over here :)

Dec 20, 2008 01:53 PM #15
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Katerina Gasset
Get It Done For Me Virtual Services - Wellington, FL
Get It Done For Me Virtual Services

Jeff- The arguement we hear all the time is that FHA take so long to do- not true any longer. That FHA appraisers are tougher and everything has to be fixed- not true any longer. The only drawback I have seen is that the closing costs run higher on FHA and you can not choose to NOT escrow tax and insurance, or has that changed too? We were not able to do FHAs here for many years because the limit was so low and there were no houses that low in price. That all has changed now too.

Dec 20, 2008 02:01 PM #16
Rainmaker
111,108
Steven Wright
Home Real Estate - Aurora, CO
CRS - Home Real Estate - 720-989-5283

Thank you for the detailed explanation. FHA loans are not bad and honestly are one of the best deals right now.

Dec 20, 2008 02:03 PM #17
Rainer
54,240
Barbara Delaney
Park Place REALTORS, Inc. - Roanoke, VA

Dear Jeff,

FHA loans got a bad rap when the "no anything" loans  became prevalent. They were easier for lenders. They were easier for buyers.

I did quite a few during that period, but they were always fixed.

Frankly, I am happy to see those programs dead. I always liked FHA, but now when things are tough, they increase downpayment! What happened to Acquisition cost loans?

Don't understand!

 

Barbara

 

 

Dec 20, 2008 02:08 PM #18
Rainmaker
276,549
Eric Egeland
RE/MAX SUBURBAN - Libertyville, IL
SFR, e-PRO, CDPE

Thanks of for the post Jeff.

Great breakdown for everyone to follow....I've been seeing more and more FHAs as of late.

Dec 20, 2008 02:09 PM #19
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Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

 

SALLY..... . thank you very much. Glad that it's easy to understand.

 

KATERINA.... . I am doing 2 FHA loans that I got this weekend, the 20th, and I am closing both of them by the 26th of this month. It can be done if you know what you are doing. Sure, the average time frame is like 3 weeks, but it can be done.

Now, I will disagree with you on this one, that FHA costs run higher than compared to convectional loans. The only difference, which I showed above, is the upfront mortgage insurance.  And as you can see, the monthly mortgage insurance is actually lower on FHA than conventional. I think the problem and issue is that it comes down to the lender or the loan officer. The actual costs to do the loan, the true and real closing costs, are the same. Again, it just comes down to the profit that the loan officer or lender wants to make on the deal.

In regards to escrows?  On a conventional loan, you cant waive escrows until you put 20% or more down. And then depending on your credit scores, 8 out of 10 times, if you are putting that much down, you would more in likely go with a conventional mortgage. So, in my honest opinion, that would be irrelevant. But yes, the lower limits did hurt many times.  thanks for your input and questions.

 

STEVEN..... . my pleasure....  and no, FHA loans aren't bad at all....  it all comes down to the loan officer, how they dissect the borrower and how they explain everything. thanks

 

Dec 20, 2008 02:17 PM #20
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Roland Woodworth
Q Realty - Clarksville, TN
Q Realty - Power In Real Estate

Jeff: Great information.. Always good to compair programs and see which is best over all.

Dec 20, 2008 03:19 PM #21
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Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

 

BARBARA..... .  I agree, when a blind guy that couldn't hear, that was able to do those types of loans. You didn't need a pulse with many of those loans. And you know what, I am extremely glad that those loans are dead also. It's actually made my life easier...  thanks for your input.

ERIC.... .  thanks and my pleasure. And I think you will keep seeing more and more FHA loans.  I do one of these breakdowns every 3 months. They make sense. It just comes down the borrower and what they have to work with.

ROLAND.... .  I agree, it's always good to compare. What's sad is when the loan officer doesn't compare apples to apples... or tells a borrower that they did a comparison, but never shows it to them... but directs them in the wrong direction. That is truly sad...

 

Dec 20, 2008 03:38 PM #22
Rainmaker
553,708
Barb Szabo, CRS
RE/MAX Trinity Brecksville Ohio - Cleveland, OH
E-pro Realtor, Cleveland Ohio Homes

Jeff, Excellent as usual and great informed answers to the questions you've received so far.

Dec 21, 2008 12:05 AM #23
Rainer
2,628
Malisia Wilkins Upstate SC
Williamston, SC

I love posts that I can learn something from. Thanks for the post Jeff!

Dec 21, 2008 12:11 AM #24
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The Somers Team
The Somers Team at KW Philadelphia - Philadelphia, PA
Delivering Real Estate Happiness

Jeff, great examples and illustrations of FHA vs conventional.  You make some great points.  Many of our recent settlements were FHA loans that all went very smooth.  It is also great when the mortgage professional can go over the programs with the consumer to help consult with them what will be the best program for them.  As realtors, I believe we all need to be better versed of the mortgage market - the options and so forth so we can all better consult the buyers as well.  Great post !

Dec 21, 2008 02:36 AM #25
Rainmaker
487,190
TIM MONCRIEF
Tim Monciref - Austin, TX
Over 2,000 homes sold…..

Thanks.  I am just impatiently waiting for FHA limits to increase dramatically in Texas.  I have not done an FHA in 25 years.  Just learned how to spell it again this past week, so I am making progress.  Hopefully we will see that move in the coming year of change.

Dec 21, 2008 04:18 AM #26
Rainmaker
517,760
Tom Burris
NMLS# 335055 - Baton Rouge, LA
Texas/Louisiana Mortgage Pro - 13 YRS Experience

Jeff...

If you were a realtor AND a loan officer.... which one would you be good at?

Dec 21, 2008 04:56 AM #27
Anonymous
Deborah

I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.


Deborah

http://termlifeinsurance2.com

Dec 21, 2008 11:51 AM #28
Rainmaker
209,487
Audrey June-Forshey
RE/MAX Realty Services - Darnestown, MD
GRI, Gaithersburg, MD

The "old what monthly payment are you comfortable with trick, eh?"  ;)  I think that is a great comparison, especially with the difference in the down payment and the fact that credit scores are such a large contributing factor these days.  Gonna reblog it.  I love good lender info.  I reblog Jason's stuff too.  I think the consumer getting as much information about the different loans is so important.

I had my settlement today, not without two other issues, but I pushed it through.  Title company was not loving me.  I know you worked today.  Now, take it easy and enjoy Christmas.  Have a good weekend.  See you soon.

Dec 23, 2008 01:13 PM #30
Anonymous
Zariah K.

The United States was founded on the principles of individual freedom, equality and due process in a democratic society, but in the area of the justice system, these principles have often been challenged.. Nowhere are the principles of human rights and democratic society more at risk today than in the U.S. juvenile justice system. Prior to the establishment of the Juvenile Court, children who were charged with delinquent actswere primarily tried in the criminal justice system, but age did play a role in presumptions of criminalresponsibility. Individuals under the age of fourteen were presumed not to possess the sufficient criminal responsibility to commit a crime, though the presumption was refutable between the ages of seven and fourteenApparently that is exactly what the government is doing to save some extra cash. Obviously, if the number of child criminals who re-offend goes back up, the number of adults who get thrown in the slammer will go up right along with it. This is going to create a bigger battle than what they are currently fighting. If you want to learn more, this article talks about which programs are getting axed in the government’s quest to save extra cash.

Jan 04, 2009 08:20 PM #31
Anonymous
mike

i want to buy this house but its conventional or cash is there way the home could be turned into fha

Sep 10, 2009 11:21 AM #32
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Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

 

Mike...  I can be reached at jbelonger@ihmci.com or on my cell phone : 609-440-5133.  I have a few thoughts and it would be easier on the phone.  Also, what state are you looking to buy in.  thanks, jeff

 

Sep 10, 2009 11:39 AM #33
Anonymous
sweety

looking to buy in Orlando, FL. need more info on FHA mortgage Ins, can this be out after 5 yrs. Also, can we pay by bank's permission biweekly instalments ; herad that Ist goes to P+I and 2nd to Principal only. That way, one does not need to pay for 30 yrs but can be done in 19 yrs or less.

 

Will appreciate response.

Dec 12, 2009 09:31 AM #34
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