Jeff posted a great article outlining and comparing a Conventional Loan to an FHA loan with 5% down. Although FHA increased the monthly mortgage insurance premium, the loan program provides great value to first-time home buyers and thoes who do not have a large downpayment. His illustration provides valuable information for you when comparing loan programs.
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.***
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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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!
For information about FHA myths & FHA rumors, please read : FHA Myths & Rumors
Copyright © 2011 by Jeff Belonger of Infinity Home Mortgage Company, Inc