FHA mortgages vs conventional mortgages -- 3% down comparision

FHA mortgages are still one of the best mortgage options out there, in my opinion. I have a few in the industry that fight me on this, but just give me words, not figures. As long as your credit score is above 500 and that you can prove your income, FHA mortgages will usually be better, unless your credit score is above 680.

This is a continued series showing you that in many cases, FHA mortgages might be your best solution when purchasing or refinancing your mortgage. Many lenders are still not FHA approved, which means that they might not have your best interest at hand, even though they are giving you their best mortgage program. But is it the best mortgage program for you?

As explained in previous blogs of mine, just because someone tells you that you are getting a conventional mortgage, doesn't mean that you are always getting the best rate. The main reason is because there are some pricing hits depending on your credit scores which I will mention below. This is either for purchasing or refinancing. Hence why FHA might be your best option.

The figures that I am about to show you are based on a $225,000 purchase price with 3% 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 680, certain fee penalties would apply to you, which would increase your rate.  The FICO (credit score) that I am going to use is 620. This is the 2nd worst case scenario in regards to least amount money down with a credit score below 680. The reason why I didn't show a 619 score or below is because some mortgage insurance companies don't allow for conventional mortgages with less than 5% down and a score below 620.  ***And keep in mind, some lenders have penalties on FHA mortgages with credit scores under 600. It all comes down to the investor. We don't have penalties on any credit score above 500.***

                                                                                                 

Type of Mortgage	Conventional Mortgage	FHA Mortgage
Purchase Price	$225,000	$225,000
Mortgage Amount	$218,250	$221,523 w/MIP
Rate with 1/2 point	6.75%	5.5%
Principal & Interest Payment	$1,415.57	$1,257.78
Mortgage Insurance Payment	$174.60	$90.94
Total Mortgage Payment PI & TI	$1,590.27	$1,348.72
Savings		$241.55 per month

Disclaimer :  These rates are just an example and can change because of various market conditions and are based on a 30 year fixed rate of today. The fees would be the same and with a 1/2 point, so to compare this scenario as apples to apples. The conventional rate also includes the penalty for the 620 credit score.

 

 

Some of you might be saying that you will be adding $3,273 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 $14,493 in that time period. This is a difference of $11,220 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 is lower. Just something else to remember.

 

 

How do I find an FHA approved lender?    You want to make sure who you are dealing with is FHA approved.

Why do I say this?  Not all lenders are approved FHA and some may tell you that you don't qualify FHA because in reality, they aren't FHA approved.

 

You can find a HUD approved lender in your area by going to the following HUD website: http://www.hud.gov/ll/code/llplcrit.html     DISCLOSURE (just be careful of the spelling of the lender. If I put in my company's full name, Infinity Home Mortgage Company, Inc, it tells me that there is no such company. If I put in Infinity Home Mortgage, it shows my company as being FHA approved. Just keep this in mind. You can always call HUD also. (202) 708-1112

Comments

[Brian]

I just discovered your blog this week and I've really been getting a lot out of it. Thanks for your efforts.

I've been using the HUD search tool at: http://www.hud.gov/ll/code/llplcrit.html to look for approved lenders and I have a question.

What is the difference between Title I and Title II loans?

Thanks again,

B.

[Jeff Belonger]

Brian,
Thanks for the compliment. I also have information at www.zeromoneydownbook.com and www.activerain.com/blogs/jeffmortgageman ....

In regards to your question. Title 1 loans are for home improvement loans insured by HUD. http://www.hud.gov/offices/hsg/sfh/title/title-i.cfm

Title II loans is a lender that has a certain net worth that can do manufactured homes also. This gets more technical, but is totally different than what Title 1 means. thanks for your comment and interest.

Can I ask you a question? You said that you are searching for a lender, are you looking to purchase or refinance? And if so, what state do you reside in?

Thanks, jeff

[Brian]

Jeff,

I am looking for a lender as I am planning on purchasing a single family home or duplex to keep as a rental property. It will be my first renal property. As I am new at this, I am working hard to learn up front in an attempt to avoid any significant mistakes or misjudgments.

I am in Kansas, in the Kansas City metro area. I am looking in Johnson and Wyandotte counties. Additionally since Kansas City straddles the state line between Kansas and Missouri, I am looking at properties in Jackson county - especially south eastern Kansas City Missouri.

B.

[Brian]

Jeff,

Can FHA loans be used by people wishing to acquire rental property? If so are there additional limits beyond the normal FHA qualification process? Also, is there a maximum number of FHA loans a person could qualify for when buying rental properties?

B.

[Jeff Belonger]

Brian,

I apologize for the delay in my response. I have been extremely busy and spend a lot of my time on my other blog site... http://activerain.com/blogs/jeffmortgageman

In any case, HUD will not allow you as an investor to buy a property as an investment property. You can refinance a property that previously had a FHA mortgage. But you can't buy an investment property. But I can still help with your normal purchases, even if an investment. Depending on your credit scores, you need to put down at least 10%.

Any questions, never hesitate to call me on my cell phone. (609) 440-5133

thanks,
jeff

[Brian]

Jeff,

Is FHA an option for refinancing my personal residence? I got an ARM in 2003 (not an irresponsible one) as I originally thought I'd be selling my home but changed my mind and now would like to get a 30yr fixed. My credit scores are 746 and up among all 3 services.

B.

[Jeff Belonger]

Brian.......

Yes, FHA is a great option. But you do have great credit scores to go conventional. It all comes down to the equity position in your home and if you would do cash-out. Many people that you would talk to would tell you to go conventional just because of your credit scores. That is so untrue and usually because they either only have conventional financing and can't do FHA, or because they have no idea about FHA.

The reason I say this is because if you are in a declining market, on conventional loans, there is a 5% reduction. Also, if you are above a 85% LTV, the monthly mortgage insurance is now higher than FHA. And at 90% on conventional, it's even higher. The MI companies are changing. You can refinance up to 97.75% on a FHA mortgage and the MI is the same and there are no hits to rates or points. On a conventional loan, you can only refinance up to 90%. And if you were doing a cash-ouy, you can only go up to 90% on a conventional loan and there would be a 3/4 pt hit for this. On FHA, you can go up to 95% with no additional hits to rate or pricing.

Hope this helps some. Jeff

[Sue]

I was approved for an FHA loan, but all the houses that I am looking at on the MLS list only cash/conventional. Do I have any options? Thank you.

[Jeff Belonger]

Sue,

Yes, there are some options. Are you working with a realtor? They should be helping you with this also. There are some ways to present your offers. Also, what about the loan officer that you are working for? Doesn't this person have some ideas?

What state are you buying in? And when were you approved and when was the last time that you spoke to your loan officer. If it hasn't been this week yet and if this loan officer hasn't let you know that rates are higher, they aren't doing you any favors. Yes, since last Friday, rates have gone up drastically, over 1/2 percent in rate. That is huge. And again, if they haven't mentioned this to you, I would be leery in using them, no matter if they approved you or not.

In any case, please don't hesitate to e-mail me or call me, so I can give you some of my ideas, on how to potentially get around this.

My e-mail : jbelonger@ihmci.com And my cell phone : 609-440-5133 I can be reached after 11 am tomorrow, up until 7 pm and the same time on Monday. thanks, jeff

[investment property]

Your post helped improved my knowledge on the matter. It also helped me make sense of some of the issues I was having with the subject. I was really glad to come across your post today.

Thanks for your feedback!

[chris polisano]

ON A NEW CONSTRUCTION CONDO WITH 9 UNITS IS IT TRUE THAT 90% of project must be conventional and 10% fha

[robin]

hi, have many questions. i am in the process of applying for first home mortage. applied at citi mortage. just received paper work, and not sure if conventional loan is the best for me. bank indicates that conventional is best for me and cheaper
right now. i also asked them about $8,0000 credit for first time home buyers - they said that they would have to see if i qualify for this or other programs. have not found home yet, looking in upstate ny and richmond, va.

any and all suggestions/recommendations are appreciated.