Short and sweet… avoid FHA Mortgages if possible.
It’s easier to qualify for FHA than Conventional. But sometimes due to a credit/income hiccup, FHA is your only option.
FHA does have the most liberal guidelines. Down payment and credit score requirements are lower. Maximum debt to income rations are higher.
But generally speaking, if you can qualify Conventional, do it. Cheaper loan product all the way around.
-only 3.5% down payment
-down to 600 credit scores (lower on case by case)
-high debt to income ration allowed (I’ve seen up to 60% DTI approved)
-rates are lower than conventional.
-more liberal underwriting standards
-1.75% FHA Mortgage Insurance Premium is ADDED into your loan amount. So on a $250K loan… that is $4375 tacked on to your balance.
-with maximum 96.5% Financing, the monthly PMI is permanent. Never falls off your Mortgage. Ouch! This is what makes FHA so unattractive. On a Conventional Mortgage, once 20% equity is established, the PMI is removed.
-$250K Purchase Price
-720 credit score
Down Payment = 3.5% = $8, 750
FHA MIP = $4, 222
Loan Amount = $245, 471 @ 3.75% 30 Year Fixed = $1137 + $173 (PMI) = $1310 per month
Down Payment = 5% = $12, 500
Loan Amount = $237, 500 @ 4.25% 30 Year Fixed = $1170 + $135 (PMI) = $1305 per month
-FHA monthly PMI is higher and attached for life of mortgage
-FHA interest rate is lower
-FHA monthly payment is higher because monthly PMI is higher.
-Notate even with a .5% higher interest rate, Conventional still yields a lower payment.
-Let’s assume it takes 6 years (72 months) for a Conventional Homeowner to establish 20% equity counting the 5% down payment already applied.
-After 6 years, the PMI on Conventional Mortgage would fall off.
-Let’s assume the homeowners carries the mortgage for 20 years (very rarely do folks carry a mortgage full term 30 years).
-20-6 = 14 years x’s $135 month savings due to no PMI = $22, 680 savings
-plus $4375 (no upfront MIP)
-plus $5 per month over first 6 years = $360
FINAL NET Savings of $27, 415 of Conventional vs FHA.