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Profile picture for krista047

First-time home-buyer; I can qualify for conventional, but is FHA a better deal?

Assuming the lenders fees are the same, here's how I see it; please correct me if I'm wrong:

Conventional: slightly higher rate, higher monthly MI, but no upfront MI and MI easier to get rid of
FHA: slightly lower rate, upfront PMI, monthly MI harder to lose

I'm planning on staying in the house 5-6 years, so I wouldn't be in the home long enough to see the benefit of the slightly lower interest rate, right? It seems like conventional is better because no upfront MI and easier to lose MI if house appreciates?
  • February 13 2011 - Portland
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Answers (28)

I love the FHA program with little down and a great interest rate for a 30 year fix, but I would make sure if you choose the product you do it before the 18th of April. After that the Single premium Mortgage insurance looks better with 5% down and depending on the credit score could be a better option it might have a bit higher rate but an overall lower payment due to buying out the monthly mortgage insurance requirement.
  • March 03 2011
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Hello Krista
With Fha your down payment requirement is minimal 3.5%. However, FHA is increasing their monthly MI from .85 to 1.15 as of April 15th (I beleive that is the exact date). It might benefit you to sit down with a loan officer to really discuss the pros and cons of each to see which product is going to fit your needs a better. Good luck to you!
  • February 26 2011
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You might want to consider a lender paid MI.Slightly higher interest rate
but a lower monthly payment.This may work better for you if you are planning to stay only 5-6 years.
  • February 26 2011
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Profile picture for The Dennis Team

In the past if you were not putting at least 10% down FHA was the way to go. 

However, in recent months HUD has increased monthly mortgage insurance premiums, and the conventional PMI companies are begining to look better.

You really need to evaluate your exact scenario both ways to decide what will work best.  PMI rates change with credit score, down payment, ratios, loan amounts, etc.

Don't forget VA and USDA options if you you qualify.

  • February 25 2011
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Frank Stadler's analysis is a good one.  I would just add that Private Mortgage Insurance on a Conventional Loan is far more sensitive to down payment and credit scores than is the case with FHA, which treats everyone pretty much the same, whether the down payment is 3.75% or much higher, as long as the mid-FICO is at least 640 with most lenders (a bit less with some).

The better your credit and the bigger your down payment (or equity in a refi situation), the more attractive the Conventional with PMI is compared to the FHA with MIP.
  • February 25 2011
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Not sure of your situation but other mortgage programs to consider would be VA and USDA Rural Development (RD) loans. Both have 30 year terms, zero down, no PMI and similar interest rates.

In my opinion, the USDA RD loan is one of the best options around but it obviously depends on the home being in a USDA Rural Development area.
  • February 23 2011
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Effective after Tax Season (April 18, 2011) FHA will be increasing its premium by almost 30%. If you are contemplating an FHA loan, be sure that your FHA case number is ordered before that date.
  • February 21 2011
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Hi Krista,

FHA loans will build the insurance for the loan into what you finance...it is not a small fee...but buyers accept it because that is their only choice. 

My main expertiese is in real estate, however, if you want to compare a FHA loan vs. a Conventional loan, I would recommend you to talk with one of my lenders.  Both are honest, competent, and competitive.  Also, both will not bug you for the loan if info is all you wanted :).

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Life is Good!

Mike Busch
  • February 21 2011
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FHA loans have done nothing but price themselves out of the conversation lately with 720+ credit scores. Private MI companies lost a lot of good business to FHA in the last couple of years but have since improved their pricing while FHA pricing has deteriorated. While the FHA loan may have a slightly lower rate, your out of pocket expense monthly may very well be lower with conventional. Also with FHA, that monthly MI payment is there for at least 5 years before you can have it removed whereas a conventional loan, you MAY be able to have the servicer remove it as soon as the market turns around and the value of the home increases. People that purchased in '09/'10/'11 may very well see a seemingly overnight 15% jump in value when the R/E turns the corner. Take that into account for sure and just knock out total expenses over the next 60 months on each loan, the lower dollar spent is the product you go with regardless of the rate.  
  • February 21 2011
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A couple things I haven't seen posted yet about FICO scores and Mortgage Insurance.

With the new FHA Monthly MI, it may be best to work with a company that allows the borrower to pay the MI upfront to save on your monthly payment. With Seller Concessions, you can negotiate these fees to be paid for by the Seller in most areas saving you thousands initially and thousands of dollars down the road. Of course these programs will require 5-10% Down Payment and quality credit scores depending on your location and available companies.

In Hawaii, we use Radian for there Split Edge program which allows you to pay a fee to decrease your monthly obligation. Simply ask your lender to look into it. Odds are they can get approved with Radian pretty easy.

FHA continues to be the best bet for less than stellar credit. With only 3.5% required Down Payment and a low Up Front MI payment, it's still a good deal, especially for those with 620 FICO scores.

And since this is your first-time buying a home, be sure to look into Mortgage Credit Certificate programs in your area. It's a Fedeally funded, state distributed tax credit which allows you to keep more of your earned income and use that savings to help qualify if needed. Guidelines put a ceiling on income limits, but that should be your only big hurdle. [Self promotional content deleted by moderator]

Good Luck
  • February 15 2011
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Profile picture for SoCal Engr
Some interesting FHA info for you here.
  • February 14 2011
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Profile picture for krista047
Thanks everyone - this was great.R eally helped me to hear to the different perspectives. Not as easy as I was hoping to hear, but that's OK.

LOL to Al, re: lenders having their own interests at heart. Touche! If only you guys were charities and money grew on trees, right?

Thanks again.
  • February 14 2011
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Assuming that you have a 720 Score, 30 year fha rate 5%, 30 Yr Conventional 5.25. Purchase Price 250k with 5% DP, loan amount $237,500.00 Borrower or Lender pays the 1% MI up front for FHA Ins or on split MI product pays 1% MI Upfront. This Scenario assumes 3% apprecaition a year.
FHA loan payment Split MI
P&I PMT 1275 1311
MI PMT 167   79
MI Cancels 9.8 years 5.1 years
Now you sell the house in 6 years P&I Payments would be 72 x1275=91800 plus MI expenses 13917 = $105,717 for FHA
Same scenario Conv with Split MI 72x1311= 94392 plus MI expenses 7125 = 101517. You save $4200.00 if your house appreciates 3% a year and MI lets you cancel at 78%. For the 4k in potential savings over 6 years you lose the availability of a  fha streamline refi if rates should drop and values continue to drop, you also lose the assumability of the FHA loan should you want to sell the house.  

GO FHA as you have no guarantees house will go up in value and should you decide to sell in the future you can offer below market financing with the assumable loan. To save 4k assuming your house is going to appreciate 3% per year over the next 6 years is out of your control.  If house doesn't apprecaite your MI on conventional would be 8017 so you would only save 3k vs the 4K.  These are hard #'s from MGIC's loan comparison tool.
  
  • February 14 2011
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Impossible to compare and analyze without knowing qualifying FICO score, planned down payment % and loan program requested.   There is no "definitively" in either direction without the required information.  

Sometimes it is a close call, sometimes the choice is clear.
  • February 14 2011
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I like a conventional loan myself, if you can qualify.  If your credit is good 640 or higher, you have a solid downpayment and your debt ratio is low I would go conventional.  Getting PMI is the biggest hurdle.  They can be tough.  Don't think that PMI will be easier to get out of early.  The PMI companies have had huge losses with the real estate debacle.  I honestly don't see them being as resonable as they once were.

If you are less than perfect, however, FHA is more forgiving. The up front MIP is only 1%, however, the monthly MIP is much higher than before.   
  • February 14 2011
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Profile picture for John Paunan
It used to be that FHA was a better bet with anything less than 10% down, but since the monthly MI factor has been increased with FHA, that is no longer true unless you have challenged credit.  I would say since you're only planning to stay in the house 5-6 years, then take the lower monthly payment (principle, interest and mortgage insurance), pure and simple.  
  • February 14 2011
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Gee...no lender ever has "their" interests at heart (lol). Lenders make more $$$ on FHA, even tho rates are lower; so any lender should offer you lower closing costs on FHA. Conventional, you and your seller are typically more on your own - re : closing costs. Most people have an "idea" of what their future is going to look like (i.e., "when" they expect to move into another home); but life has a way of not always making that path as easy in the future (As it looks today); so I would recommend FHA (personally).
  • February 14 2011
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With less than 10% down, FHA is the better way to go.  10% or more down, a conventional loan with PMI pencils out better.

  • February 13 2011
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I would go conventional.
  • February 13 2011
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Profile picture for funds2
Not knowing the Sales Price, amount of your down payment, income, debt, or current housing expense, it is not easy to make a pertinent comparison.  One option depending on answer to above would be an FHA 15 yr loan with no monthly MI with 10% or more down. Downside is qualifying for higher payment (difference mostly equity though) which could be a negative if decrease in income should occur. 15 yr. loans are not for most first time homebuyers, but if you are considering options this is one to see if it is a fit.
  • February 13 2011
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Thier are advantages to both programs. You see to be a straight numbers guy. You loan officer should be able to go to MGIC'S website they have a   MGIC loan comparison calculator web address is www.calculators.emagic.com/Calculators/servlet The loan originator will be able to quote you on 3 different scenarios FHA, Conv with Standard MI and a Split MI program (pay 1% upfront like FHA but then the monthly MI factor is reduced. Or the loan officer can substitute one of these programs with Lender Paid Mortgage insurance. With this canculator you can see which is the better option to go with at 5 year 6 years, 7 years or what ever.

While conventional says you can drop the MI at 78% thier is no guarantee that they will drop it. Appraisal will be looked at closely.

This calculator is a great tool to use for comparisons.

  • February 13 2011
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Krista I compliment you on your homework. Good job. I for one am 100% with you on this. .... Happy funding, Rudi
  • February 13 2011
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Profile picture for krista047
Thank you all for the answers.

Kerri, I have talked to several mortgage professionals, which is how I know that I can qualify for a conventional loan. Different answers from different lenders brought me to this forum. I was told "definitely FHA" by one and "definitely Conventional" by another. I'm assuming that at least one of them has their own interests first. The estimates of cash to close and monthly payments were so similar, it made it hard to determine.

I understand the benefits of FHA if you can't qualify or afford the down payment for a conventional, but that isn't the case for me. I just want the best deal. For someone in my situation who will be staying in the house for 5-6 years, it seems like it all boils down to the mortgage insurance issue - how much you pay and how soon you can get rid of it, then?



  • February 13 2011
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Opting for an FHA loan because it is assumable...Last thing you should be thinking off!

FHA MI is a minimum of 5 years or until you rech 78% LTV based on the original Amortization schedule (appreciation is not factored in.).

Conventional MI is upto the lender.  Most will consider removing MI based on a current appraisal, however that is not a guarantee.  Not to mention what a lender/Bank will do today has no bearing on what they will do tomorrow.  Meaning that just because a bank would consider removing MI today that does not  bind them to considering it in the future.
  • February 13 2011
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Their are advantages to both FHA and conventional financing, and depending on your specific situation, such as credit score, and your down payment, will determine what you pay in interest and Mortgage Insurance. FHA seems to be a good option for a lot of first time buyers because of the lower down payment, and that it is easier to qualify with lower credit scores. Some lenders such as Wells Fargo, and Prospect Mortgage will lend down to a 500 fico, with specific guidelines. The advantage of the slightly lower interest rate means that you have a lower monthly payment, which will add up over the length of your loan. However, I would recommend talking with a loan officer to determine what the exact cost of each program would be after 5-6 years, before you make a decision. I also agree that having an FHA loan with the possibility of assumption to qualified buyers, will be an advantage 5 or 6 years down the road when you decide to sell. If you have not talked with a mortgage professional yet, I would suggest talking to someone with some financial planning experience to help you determine what is best for you. I am happy to refer you to someone in the area if you are interested.
  • February 13 2011
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Find out from both if and when you can quit paying the MI.

Also, many people, including mortgage brokers, don'tr realize that FHA loans are assumable.  That means down the road when it comes time to sell yoour house, and interest rates are higher than now (as most predict), the buyer of your home can assume your loan.  If you are getting, say, a 5.5% loan now, and rates in five years are 7% or 7.5%, the buyer can assume your 5.5% loan--which would give your house a marketability advantage.
  • February 13 2011
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Some facts still needed to make the detrmination.  Generally, the lower the credit score and the lower the down payment, the better FHA looks.

A third factor is the combination loan, a first and second mortgage to avoid MI altogether.

Try to get to at least 10% down.  It's more financially solid.

  • February 13 2011
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Monly MI is probably more on FHA depending on your fico score and Downpayment.  FHA usually Wins with Lower Fico scores and Lower Down payments.  10% or more down and a Conventional loan will likely be the better option.
  • February 13 2011
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