FHA loans vs conventional loans -- The true story told by numbers....
FHA loans are not the next subprime loans. Don't let anyone fool you on this. FHA has been around since 1934, subprime mortgages
started to emerge in 1994. Subprime loans in many cases were good for
those lenders that weren't FHA approved. The problem with that is the
rates on subprime mortgages were typically 2% higher than FHA mortgages.
Just because someone said they can qualify you for a conventional loan and that it would be cheaper than a FHA mortgage, might not always be correct. In many cases, FHA loans are now cheaper than conventional loans, which is shown below.
One main reason why a loan officer might still make it sound like conventional loans are cheaper than FHA loans is because they aren't FHA approved. Another reason would be because they don't know much about FHA mortgages.
The example below is based on a $300,000 purchase price with 10% 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 640, which is above average credit and will still show in this example that FHA loans are cheaper, even with 10% down.
***And keep in mind, some lenders have penalties on FHA mortgages with credit scores under 620. It all comes down to the investor. We don't have penalties on any credit score above 580. And we can do credit scores down to 550. Many lenders can't go below 580.***
Type of Mortgage | Conventional Loan | FHA Loan |
| Purchase Price | $300,000 | $300,000 |
| Mortgage amount w/10% down | $270,000 | $274,500 |
| Mortgage Rate with Zero Points | 7.00% | 6.00% |
| Principal & Interest Payment | $1,796.32 | $1,645.77 |
| Mortgage Insurance Payment | $117.00 | $112.00 |
| Total Mortgage Payment PI & TI | $1,913.32 | $1,757.88 |
| Savings |
| $155.44 per |
Disclaimer : These rates are just an example and can change because of various market conditions and are based on a 30 year fixed rate as of today. The fees would be the same and with zero points, so as to compare this scenario apples to apples. The conventional rate also includes the penalty for the 640 credit score.
Some of you might be saying that you will be adding $4,500 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 $9,326.40 in payments in 5 years. This is a difference of $4,826.40 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
Copyright © 2008 by Jeff Belonger
Author of this blog : Jeff Belonger
e-mail : jbelonger@ihmci.com
