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.
- FHA Loans - USDA Loans - Conventional Loans - VA Loans - Mortgages - Experience & Knowledge at its BEST !!!
________________________________________________________________________________________
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
FYI – any loan officer that wants to challenge the rates in the first example? Please read your rate sheet first and check for the penalty with credit scores under 720 with 5% down. I bring this up because of some of the comments that took place in this blog…
FHA loans vs Conventional loans - A real comparision with 5% down
Jeff: BEAUTIFUL clear comparisons. This is the kind of post I want my buyers to be reading.
Thanks for the breakdown Jeff, a good mortgage broker will always find the best program for a purchaser!
Happy Hollidays,
Shawn
Great analysis, thanks.
Jeff, great comparision and explanation. You are definitely on top of your game!
KELLY..... . thank you very much. From my 2nd year in the business, this is how I would break things down. Please don't hesitate to copy this on your outside blog page or to reblog on here. Thanks again for the polite compliments.
SHAWN...... . I would agree with that statement. And what becomes hard is defining best program. There a few ways to look at things. But at least something like this, your consumer can now make the best choice for themselves. PS>.. I can lend in Michigan and have before. In reality, about 85% of my business that I close is outside of my state of New Jersey. And Happy Holidays to you ...
JANICE.... . thank you and thanks for stopping by.
TIM & PAM...... yes, I can throw 50 yard passes. Oh, that game. ;o) I just really believe that the average consumer should get this kind of break down. Now, I do know if their credit scores are lower, that FHA is the best way if they have money to work with. And seriously, I truly appreciate those comments... thanks
Jeff,
Thank you for the breakdown. Charts with hard numbers are so much easier on a consumer's eyes and are more digestable.
Thanks Jeff,
We're not in the market right now, but I need to get a better understanding for the future.
Jeff, it does seem like all of the properties that I have closed, either as the Seller's agent or the Buyers' they've been going FHA. I think this is where it's critical as a good agent to have a good lender that you trust to take care of your clients. I hate it when they want to use their "buddy" and then they're not happy with the results. Thanks for knowing what you're doing and looking out for "our" clients! Merry Christmas
REBECCA..... . I totally agree 110%.... glad that it was easy to understand. thanks
BRUCE..... . you aren't in the market right now? Meaning the location that you are in? Or that you are buying a home? But yes, getting a better understanding for all is very good. thanks
CONNIE..... . in regards to the buddy comment... that's a tough one, because many just feel comfortable with their buddy... yet, many of these so-called buddy's won't give them the full truth if they aren't sure or have a clue. But I agree, you need not only a trusted loan officer, but one that can explain it easily in simple terms. thanks
In thing you forgot. The PMI can come off at 80%. The FHA premium stays on for 30 years therefore costing more.
Also, conventional loans are normally better in rates because of more competition between lender/brokers and the public.
Shop and compare is the bottom line!
FRED... thanks for stopping by... but no, I didn't forget this. In regards to PMI, it only comes off at 80%, if you challnege it with an appraisal. If not, it comes off at 78% automatically. In regrds to FHA mortgages. HUD changed this a while back. I am not sure of the date. But it falls off the same as conventional mortgages. Here is one place that it talks about the monthly falling off at 78%. I also know it's on HUD's web site, I just need to find it.
In regards to your statement about conventional loans normally have better pricing than FHA.... hardly. FHA's SRP's are almost 30% better... and as I mentioned a few times, if you have credit scores that are under 680, in more times, the FHA rate will be better.
Yes, shop and compare... but you need to compare with those that actually know what they are doing. Just my opinion...
Jeff,
Here is a line from the article you sent me:
"So, if you didn't pay an upfront mortgage insurance premium, the lender is right and you can't get out from under the MIP while you're in the loan."
And, up front is paid nearly 99% of the time. Can you check with HUD and make sure?
Thanks.
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.
Beautiful comparison and as always....good info over here :)
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.
Thank you for the detailed explanation. FHA loans are not bad and honestly are one of the best deals right now.
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
Thanks of for the post Jeff.
Great breakdown for everyone to follow....I've been seeing more and more FHAs as of late.
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
Jeff: Great information.. Always good to compair programs and see which is best over all.
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...
Jeff, Excellent as usual and great informed answers to the questions you've received so far.
I love posts that I can learn something from. Thanks for the post Jeff!
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 !
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.
Jeff...
If you were a realtor AND a loan officer.... which one would you be good at?
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.
i want to buy this house but its conventional or cash is there way the home could be turned into fha
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