For several of you that read my blogs, I try and do a FHA vs Conventional purchase comparison once every few months.
FHA loans have been more wisely used in recent months as the choice of mortgages. 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. A recent survey has stated that FHA loanscould be more than 60% of all loans originated for the 2nd quarter of 2009.
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 or even 5 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 700, 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..... and in this scenario,
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 679, which is above the average credit score and I will still show in this example that FHA loans are cheaper, even with 5% down.
***And keep in mind, some lenders have penalties on FHA mortgages with credit scores under 660 now. We don't. And many lenders can't do FHA loans under 620. I can still do them down to 600. Just beware of those promising you FHA loans under 600, they don't close as much as promised.***
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 1.75 points. In this scenario, there are no lender fees. The conventional rate also includes the penalty for the 679 credit score.
Okay, Jeff, you used 4 total examples. I am confused. A better than average loan officer will use all 4 comparisons, to show you the bang for your buck. I will explain each one below.
Conventional vs FHA - Your monthly savings is $170.36, favoring the FHA loan. 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 $11,115.00 in payments in 5 years. This is a difference of $6,218.00 that you have saved!!! And one other thing that is very small, but still makes a difference.
Conventional Financed MI vs FHA - On the conventional loan, you can get a huge discount by adding the mortgage insurance onto your loan amount. Now your FHA monthly savings is only $37.83 a month, but you are now adding $4,560 to your total loan amount on the conventional loan. That comes out to an additional $76 a month over a 5 year period, if you wanted to pay down your mortgage to the same as the FHA loan. So now your total monthly savings is $113.83. Yes, you do get a larger tax write off on the mortgage insurance being financed, but with the lower rate on the FHA loan, you also subtract more off the principal quicker.
Conventional Lender Paid MI (LPMI) vs FHA - On the conventional loan, you are paying a higher rate, which part of it pays for your monthly mortgage insurance. Your monthly savings on the FHA loan is only $74.44. In 5 years, you saved $4,466. But you added $4,897 onto the FHA loan, which means that in 5 years, you came out $431 better on the conventional loan in 5 years. But hold the presses... You get a higher tax write off, because you added more money onto your FHA loan and you are slightly reducing your principal because you have a interest rate that is 1.25% lower than that of the conventional loan.
The end result on the 3rd comparison? You will still come out ahead on the FHA loan. But let's take it a step further. Take your savings of $74.44 a month and add it back into your payments monthly for 5 years. Guess what, my principal balance in 5 years on the FHA mortgage is $5,199 lower than that conventional mortgage.
Again, a very good loan officer should understand these comparisons and be able to show them to you, if you need to see the numbers to help make your decision. I have heard many borrowers in the past say that their loan officer did these comparisons and suggest the conventional loan. Rut row... I didn't fudge these numbers. ... just a FYI.
Another Footnote : 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 higher rate. Just something else to remember, but consult your tax consultant or CPA.
For more updated information on Conventional PMI (private mortgage insurance) - Please read this detailed blog by Robert Rauf. The new world of PMI - update (FHA loans save the day)
For more FHA loans vs conventional loans comparisons :
- FHA loans vs Conventional loans - A true numbers comparision with 5% down - Using a 710 credit score
- FHA loans vs Conventional loans - A real comparision with 5% down - Using a 659 credit score
- FHA Loans vs Conventional Loans - 20% down - A Rude Reality Check - Would you believe that FHA loans could be cheaper even with 20% down? Come see why and how.
- FHA Loans vs Conventional Loans - 5% - 4 comparisons that you need to know - Comparing a FHA loan against 3 types of conventional loans with different types of monthly mortgage insurance. Guess who won while still using a 679 credit score.....
- FHA Loans - USDA Loans - VA Loans -
- Energy Efficient Mortgages -
- Conventional Loans - 203 k loans -
- Mortgages -
Experience & Knowledge at its BEST !!!
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For more information on FHA loans, please go to this link. The FHA Expert
For more information about the 2009 Tax Credit for First Time Homebuyers : 2009 Tax Credit
For important mortgage insight to watch for, please read : Consumers need to be aware of these Red Flags !!!!
Copyright © 2009 by Jeff Belonger
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- FHA Loans - USDA Loans - VA Loans -
- Energy Efficient Mortgages -
- Conventional Loans - 203 k loans -
- FHA Home Loans - Mortgages -
Experience & Knowledge at its BEST !!!
Follow me on:
______________________________________________________________________________________________________________
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
Thanks for data Jeff - Go FHA.
Jeff, KUDOS to you. This piece is well written and a great comparison. Education is key in explaining the differences and sharing that knowledge with your client. Thanks for taking the time to put it in simple terms.
It's always good to see your FHA/Traditional Mortgage comparisons. I'm thinking about re-blogging this one.
Jeff
I did not get my HP12 to verify your data but you seem to have your info pretty well analyzed after 16 years so, I'll take your data for granted and start recommending the FHA loans. Thank you.
Isaac Bensussen
Isaac Bensussen-www.besthomesinlajolla.com
DAN.... . my pleasure and thanks for stopping by.
VALERIE.... . I love doing these types of comparisons. Especially when other loan officers mislead the borrower, telling them that one program is better than the other, but that they never ran these comparisons. It's usually because they don't know or by telling the borrower that they did, it will convince them to go with a mortgage program that is easier for the loan officer and not better for the borrower. I see this more often than I would like. And thanks for the polite compliment.
LISA..... well thank you... and you can always reblog any of these. As you can see, I actually listed a series of different types of comparisons. thanks
ISAAC.... knock yourself out. I have been doing different types of comparisons even in my first year, when I was comparing fixed rate mortgages vs the adjustable rate mortgages. This is not as complex as it looks... it's simple math and took me about an hour. thanks
I am starting to see the world open up to the FHA mortgage. Slowly they are understanding what you have just illustrated so eloquently. Mortgage Insurance today has such criteria to qualify. DTI, fico and reserves for MI on a conventional mortgage. FHA will continue to grow in popularity over time. Escpecially with the new HVCC laes that have been put in place on conventional appraisals.
Hi Jeff, Good post. Thanks for sharing.
Best - Sash
Jeff,
This is the most concise and clearest comparison I think you've ever done- super great job and very feature worthy. I know many have questioned you in the past regarding the FNMA/FHLMC hits but you've made it perfectly clear.
Also, adding the comparison to the ever popular financed and lender paid MI's covers all the bases. Great work Jeff!
Gerry Suarez, Jr.
Your FHA Loan Pro!
MATT...... You weren't logged in. ;o) Hey, you hit some key points that I didn't, but that Robert Rauf did in his post. Stuff like reserves and DTI requirements. MI is not at all easy as it use to be and is slightly more pricey than just a year ago. Yes, FHA hands down, in more cases than many would think, would be the better solution.
I am still seeing loan officers take advantage of consumers when doing FHA and not conventional, because it is their last resort. I just took an application yesterday, a gentlemen buying his first house in Florida, and I beat the other lender out by 1/2 percent and saved the client $1,700 in lender fees. Come on, we are all here to make money, but that is some serious savings. I think we'll see many loan officers and lenders abuse FHA in the next 6 months more than ever before. I just hope HUD cracks down on them as they said they would and not just based on fraud. thanks
SASHA.... . my pleasure and thanks for the compliment.
GERRY.... . I would have to agree with you 110% on that comment. Part of me didn't want to break it all down, because something like this takes a long time. No wonder in several cases, it takes me forever to compare stuff for a client... lol Many people just don't know what I do behind the scenes.
In any case, get a chance, read Robert Rauf's blog also, because he gives a great break down on the MI just by itself and why FHA is that much better. And thanks for the extremely polite compliments.... It's truly appreciative. thanks
Wow, Jeff, what a thorough and transparent post. I don't think you could have explained it any better or made it any more clear. And - by doing so, you have definitely demonstrated your knowledge in the marketplace.
Great post - very well done. Thanks for the explanation!
Hey Jeff!
Awesome numbers, and great detial. Thank you and I will have to talk to my local lenders to see how it works out in my area. Thanks!
-Lisa
Hi Jeff -- There is nothing like an example. This post illustrates the critical importance of using a very competent loan officer like you to ensure your financial interests are well protected in a transaction.
CHRSITIANNE..... . thanks, I truly appreciate that polite comment. As many know, I love numbers and breaking down the deals. And I will admit, you don't see this often because it takes some time to do this. And in many other cases, some loan officers just gove numbers to their clients that might not be good, but because it was easy for them, not the borrower. Again, thank you very much for those kind words.
LISA..... . thanks... I would love to hear what your loan officers have to say about this. I am always looking for new opinions, ideas, and insight. thanks
CHRIS..... . I agree 110%. Numbers don't lie if they are laid out correctly without predudice of what you are trying to sell. I just see so many, many more than you would expect, that just know the basics. That some loan officers just tell you what is easy for the loan officer, and not what is good for the borrower. I am hearing more of this now, in 2009, than even before when there were more loan officers in this business. Makes you wonder if more good ones got out instead of the bad ones or just that we have more less experienced ones or those that just treat this as a job and not as a career. thanks for the polite comment.
... yeah but can you give me a little more detail next time Jeff ?????
LOLOL !!! Well done Sir ! - Boy the thought and example in this post make it rather difficult to combat on any level !
Nice comparitive update, and one we all should be aware of and be able to explain.
Cheers !
Sheldon
Jeff, that is awesome! I am going back up to hit the reblog button. You really did an amazing job. Such misinformation out there. Thank you!
Jeff this is a fantastic and easy to understand comparison. We've been using mostly FHA loans since Jan and we're getting into the 203K to handle our foreclosures that are a mess. Plus.....they are assumable and when interest rates go up, and we know they will, this will be a very attractive loan to have.
So........I see that Andrea is re-blogging. Since I'm new to the rain I would like to know how that works. This is a post I'd like to share with our readers.
Thanks again!
Great info. Mortgages are probably my weakest area so i am trying to learn as much as possible. Thanks
Good stuff Jeff. This is why you are the FHA pimp. Keep um coming our way. Have a great weekend
SHELDON..... cute... well, I am having a special class just for you, that will be 2 hours off numbers, numbers, and more numbers... lol In any case, thanks for the nice compliment.
ANDREA..... I would agree with the misinformation out there. It's one thing to make a mistake, because not one of us is perfect, but not knowing the basics or putting information out there that you aren't sure is correct??? It drives me crazy and many others that I talk to about this. thanks for the compliment and for reblogging this.
ANNA.... . FHA loans... especially FHA 203-k streamline and 203-k loans are very good loans. They can help with so many issues regarding the condition of the home. Just that I know many that don't have a clue about the 203-k, because you need some experience with these.
In regards to FHA assumable loans.... yes, this is a great pro about FHA loans... but everyone should be aware of the other side of assuming a FHA mortgage. Please read : FHA assumable loans - Creative thinking, but things to beware of
About reblogging? Go to the top of this blog and you will see a green reblog button. Just put your cursor over it and click onto it. A new blog will appear. The beginning will be blank, to where you can give a quick introduction about the blog that you are reblogging. Please read : Do you show coutesy to those blogs that you reblog?
AARON.... look at that, 3 A's in a row... ;o) Well, being a realtor that you are, being weak in mortgages shouldn't truly be a problem. Hence why realtors should just leave these kinds of numbers up to us. I get negative feedback sometimes on these numbers posts, but the ironic thing is that it's always from someone that is both a realtor and a loan officer. Imagine that. ;o) My point, a dentist should leave heart surgery to a heart surgeon. thanks
WINSTON...... well, I wouldn't go as far as to call me the pimp of FHA... lol But I do appreciate the kind words. Maybe the King? lol Seriously, thanks and you have a great week also.
Jeff, your clients are lucky to have a loan officer who believes in education. That's the sort of service I have had from the loan officers I have the opportunity to work with here in Michigan. When people are given all the facts, they are more likely to make intelligent decisions. Appreciate the information you & other loan officers share here on Active Rain.
Jeff, I always learn alot from your posts - thats whay I subscribed after reading a featured post of yours a few months ago and checking your other posts out. This is exactly the type of information that needs to get out to people to help educate them as well as help combat abuse from less than ethical lenders. Thanks for your hard work! I'm re blogging too!
Brian.
Jeff, You sure have a great grasp on all of this and do such a wonderful job of explaining it. Enjoyed reading the info and looking at the comparisons.
Ok you made your point. And the yellow-highlighted cells win. I have not yet done an FHA loan, but I have a feeling i will certainly be doing them in the future.
I bookmarked this excellent comparison chart. Thanks for putting it on your blog.
Great post. Well thought out, written, and presented. I am going to reblog this post for my readers. Thanks!
Jeff, I use to do a lot of FHA loans while in Virginia. But, not much in this area, at least not yet. Good information and comparisons. I'll bookmark this for a referrence. Thanks,
LOLA... . well, thank you very much for those kind words. And you are fortunate to know some trusted and good with numbers kind of loan officers in your area. Not saying that there aren't that many out there, but from my experience, I would say that there are more that don't know as much as there are that do. Just my .02... but that is coming from talking to other loan officers and many borrowers. thanks
BRIAN & MARIE..... I love to educate, to be creative, and to possibly beat the system for that borrower. thanks for the polite comment and for reblogging this.
JUDI..... I am glad that you enjoyed reading these comparisons because this can be some boring stuff. Nothing fun or funny about this blog. ;o) Thanks for stopping by and for your support.
RONNIE..... . it just comes down to that specific borrower that you are dealing with that this kind of loan would help more than other types of loans. And it also comes down to the loan officer that your borrower is dealing with. If they don't feel comfortable with FHA mortgages, they will just push conventional loans, even if the other might be better for that borrower. thanks
BARBARA.... . my pleasure and thanks for bookmarking it. hope it comes in handy down the road. And if you ever have any questions, please never hesitate to call me. thanks
MAUREEN.... thanks for the kind words. I wish I did this well in school, when I was younger. ;o) And thanks for reblogging this.
REBECCA.... . Not sure why your borrowers would you conventional loans more in WV than in VA. Maybe the loan officers just know one type of mortgage to push? Or maybe you just have many buyers that have great credit and lots of money to put down. thanks
Great. One of the best post to reblog I have seen. I couldn't do it better, or anywhere near as good as you for that matter.
This is very well presented, and will likely clear up many misconceptions about FHA loans compared to conventional.
Exactly how many years of experience do you have?
Unless you have a 740 Credit Score and 20% down, FHA is the loan du jour in most cases. That said, I heard a vicious rumor that you were perfect & God-like. Any truth to these tellings?
your despicable friend,
Sardi
JOE.... . well, thank you very much for those kind words. It's much appreciative.
CHRISTINE.... . I think it's a start. The two that I hear most are that FHA loan's closing costs are higher and that they can be more expensive because of the upfront mortgage insurance. Even the first part of the statement can be tied to the second part of my answer. I will be writing a blog on this today or tonight. thanks and thanks for the compliment.
JASON..... aren't you the funny devil... just don't quit your day job. lol In regards to credit scores, I would like to say under 700, but again, it comes down to the state that you live in also, if putting 5% down, because of the declining market areas.
In regards to my years in this business? I think it's like 58 years? Oh, wait, I am only 42.. lol And no, not god or perfect, far from both, but damn good at what I do. ;o) Thanks for the comment.
Thanks for the info Jeff. Many more clients seem to be going the FHA route these days, so it's nice to see the numbers. It also helps to have higher DTI limits for the FHA as well.
Jeff: Great information on the comparisons. Always great to get your updates.
I have never seen it with your detail, but just the assumable factor of FHA is a selling point over conventional.
Jeff, that took you some serious time to put this post together and share it with all of us, I find it very useful and informative, there were a couple of things I did not know about, but I feel that I understand FHA loans a bit more. Thank you for your thoughtfulness.
Antonio
Jeff, Thanks for the info. So many people were re-programmed during the boom not to use FHA. It's always been a Great loan.
Great explanation and very clear on the differences. Good information for the consumer to sift thru when looking for the dollar differences on Conv vs. FHA. You also bring up a good point about 'steering' toward Conv when the lender themselves are not FHA approved. They forget to tell Mr. John Q Public that info.
Nice to see someone who knows what is really going on. Very well put. i uses to be a Mortgage broker, but bailed as FHA was too difficult to get in with. I moved to Real Estate which was the best thing I could have done. Especially because there are very well versed and experienced folks such as yourself that can truly help these folks better than I could have.
FHA is a problem around here in the entry-level price range, when purchasing a bank-owned. The FHA buyer never seems to be the one who wins, and all the best deals out there have multiple offers. I suspected it was because the banks are advised by their agents that the house won't work for FHA because of conditions. I just had clients switch to conventional specifically because there were no appliances in the house, and we closed last week! So I love a lender that looks into qualifying them for both, and can explain the pros and cons of each. Thank you!
MICHAEL..... Yes, many more seem to be going FHA now. What scares me though are some of the lenders and loan officers that sold mainly subprime, are treating FHA as subprime. I hear from many borrowers that are sold on just FICO score and not their overall credit. I just had one over the weekend, that her loan officer from B of A said that she fir the credit score of 620. After going over her credit, she had some lates and some collections. I asked her if the previous loan officer went over this with her and she said no. That is scary, that he qualified her on her credit score. She needs some work on the credit. And yes, higher DTI's help also. thanks
ROLAND.... . my pleasure and thanks for the compliment & for the support.
GENE..... . I love doing detailed, thought out, scenarios and comparisons such as these. The problem is that they do take some time if done correctly.
In regards to the FHA being assumable. Yes, it's a great feature, but people need to be more aware that there are other issues when assuming a FHA loan. FHA loans can be assumable, but beware of some minor pitfalls. thanks
ANTONIO.... . yes, it did take some time, but that is the part that I truly love about my job, because I would have to say that at least 50% of all loan officers don't do these types of comparisons, when you have a borrower that is borderline. thanks and I am glad you could pick something else up from this.
Hi Jeff, thanks, I will use this comparison chart to help my buyers. You hit a good example price for this area, too, works well for me.
.
DAVID... . not only were some not programed not to use FHA, because it did take longer for them, but might have been a better outlet for their borrower, but that many weren't taught the differences either. You can blame management or that specific mortgage company also. I knew of some mortgage sweat shops that focused on closing loans quickly and cheaply on their end, and not for the consumer. thanks
LYN..... thanks for the kind comment. Yes, I have caught some lenders that steered that borrower into a conventional loan, come to find out that they weren't even FHA approved. Or that they lost their FHA license to write FHA loans. And no, they don't forget to tell Joe Public... lol thanks
GARY...... thank you very much for the kind comment. And I wouldn't necessarily say that you failed as a mortgage broker, but that times have been tough for many of us and there are too many loan officers fighting over certain deals... a lot of bait and switching with false advertisement or just lies to get the borrower to use them. So they could have failed you. But glad things are going well know, as a realtor. thanks for stopping by.
JOETTA.... . sure, some properties might not be in top shape, but FHA appraisals aren't as tight and restrictive as they once were in the 90's. And there are the 203-k loans and the 203-k streamlines... and the streamlines don't take as long as many say they do.
In regards to the client that you just had, that went conventional, because there were no appliances in the house. Please describe appliances. Under FHA, all we need in the kitchen is a working stove/oven and a sink. ... unless the contract says that the seller is keeping the refrigerator in the house. But that is all that is needed to approve a FHA loan in regards to appliances. thanks
VIRGINIA.... I am glad that I could help and that this comparison was o target for you and your clients. thanks
.
Jeff, There is still so much Negativity floating around RE FHA loans that it is just plain silly. We need to educate the Real Estate world, and our buyers that there is nothing wrong with an FHA loan. Not only is it better for a buyer when you compare monthly payments and cash out of pocket, but often it is the ONLY way to get them approved.
The one piece that we all need to understand is FHA may even be a better choice for some buyers that have 20% down. The Conventional "add ons" for credit score and LTV's can be ugly today.
Here is a link on my post that talks about PMI, with a touch of FHA that is a good balance to yours:
http://activerain.com/blogsview/1059487/The-new-world-of-PMI-FHA-SAVES-THE-DAY
Congrats on the Feature.
I am bookmarking the post.
Thank you
Darin
Bookmarked. Love the 4-Option Comparison. I'm glad you keep us up to date with this information on a regular basis. It's great information especially when things are changing so quickly in the industry.
Jeff,
Nice breakdown and comparison with a good explanation that is easy to understand.
Great Job Jeff..........hope you don't mind the reblog! More people should be enlightened. Thanks for sharing!
Jeff, good analysis. You've shown me why FHA can be a better choice even with 5% down.
Robert.... thanks for that link from back then, even though some things have changed. I remember reading that post of yours and thought it was excellent. Overall, yes, it does come down to us educating the general public and many realtors about FHA loans. thanks
Brian S. ... thanks.. I will be doing a new one of these this week. The reason being is because things keep changing, even with conventional loans, and because rates are lower... and because MI on both conventional and FHA have changed. thanks