CONVENTIONAL LOAN VS FHA LOAN?

With the required loan we were offering 7.8% seductiveness rate with 10% down.

With the FHA loan we were offering 7% seductiveness rate with 5% down.

Which would you choose? The reduce rate or the ‘conventional’ loan?

(BTW both have been thirty year bound rate)

{ 9 comments }

shamieya February 28, 2014 at 9:28 pm

Choose the lower rate. You can put as much down as you want and you can make payments as high as you want.

hollywoodmelody February 28, 2014 at 10:23 pm

Both sound good but there are restrictions with both FHA and coventional. I would say go Conventional because FHA guidelines can be tough and may fall through at the last minute. That happens with conventional as well but the Underwriter has more to work with.

DJ B February 28, 2014 at 11:13 pm

It really depends on your current financial situation, and future as well as credit history. The more you put down in theory the more equity you have in the property. What will .8% mean in payment or dollars each year and is that enough to make you choose the lower rate? Only you can decide. In today’s market, either way depends on your financial situation. Realtor 20 years

Mary B February 28, 2014 at 11:44 pm

Take the FHA loan, and put 10% down instead of the required 5%. Yes, you can do that.

Even though FHA charges PMI, your payment will be cheapter than the 7.8% interest…ALOT cheaper.

FHA loans are easier to get than conventional loans and have more relaxed guidelines. Be sure to deal with someone that is familiar with FHA loans…loan officers that say they are difficult loans, just doesn’t know how to put one together.

Once you learn, they are no big deal and work NO DIFFERENT than any other loan.

PS: There is NO REASON why an FHA loan will “fall through” at the last minute unless you are dealing with an incompetent lender.

valstpatrick March 1, 2014 at 12:42 am

FHA loans are NOT score based but use your last 2 years credit, employment and rental history. You MUST not have any lates at all in the previous 24 month period. Additionally, no bankruptcies in the past 4 years.

FHA programs the property MUST pass an inspection as well. Older homes may not pass (roof must have 5 years life left etc) Your lender should explain ALL of this to you.

With the lower down payment you MIP (mortgage insurance premium) requirement will be higher that is you put more money down 10%. So in theroy, the lower interest rate may cost you more monthly.

Make yourlender show you side by side BOTH programs. Then evaluate your savings and monthly costs – pick the loan that best FITS YOU.

Hope this helps.

Ken March 1, 2014 at 1:18 am

FHA definitely. You will have an FHA premium but with the conventional you will most likely have PMI. The lower rate will allow you to pay your mortgage down faster thus losing the insurance premium more quickly. Here are some numbers:

$100,000 property ($95,000)loan, 5% down 7% interest:

P&I Payment $632.04 per month.
Total interest: $132, 533.45

$100,000 Property ($90,000 loan) 10% 7.8% interest:
P& I Payment: $647.88
Total Interest: $143,238.04

If you put the extra $5,000 down on the FHA at 7%:

P&I Payment: $598.77
Total Interest: $125,558.01

If you put the extra $5,000 down AND pay $650.00 per month toward P&I (what you would pay in scenario 2):

Total interest would be $93,906.07 and would cut 6 years off your mortgage. More importantly, it would get you to that 20% threshold that you need to get rid of your FHA premium about 3 years faster (assuming 0 increase in equity). The important thing is to get rid of that FHA premium as soon as possible and then continue to pay that toward principle.

Good luck.

P.S. FHA inspections are not nearly as stringent as they used to be. If the house appraises, then FHA will usually pass it these days. I wouldn’t make the choice based on the FHA inspection, if it doesn’t pass FHA then you probably do not want it anyway.

matsonb March 1, 2014 at 2:09 am

Is this a trick question? why wouldn’t you choose the lower rate AND lower payment with the FHA loan? Sounds like an easy decision. http://www.choicefinance.net/

Casey C March 1, 2014 at 2:55 am

MaryB and Valstpatrick are right on the money here. A couple of additional points here though. Closing costs may be quite different between the two programs, especially if you are working with a broker that might be using two banks.

I can’t stress enough the importance of side by side comparisson. I can do this for you in about five minutes. You are more than welcome to send both “Good Faith Estimates” and I can figure it out ASAP for you. casey.x.casperson@chase.com

togashiyokuni2001 March 1, 2014 at 3:42 am

What do your Fannie findings say? With an FHA program, your rate will be lower, but you’ll still pay MI. The same is true for a conforming program, but conforming loans have different programs available to them that FHA programs don’t have that will affect your MI. Conforming has the My Community program, which has an income cap, and it also has Lender Paid MI available through the lender, where you take a small bump in the rate to have the lender pay the MI for you. Usually saves you a significant amount of money every month. In this situation, if your Fannie findings give you a rating of anything less than Approve/Eligible, then it is to your advantage to go with a conforming loan with LPMI if they can do it for less than 8.25%. Otherwise, go FHA.

Comments on this entry are closed.

Previous post:

Next post: