Turf War! Conventional vs. FHA Financing

Tuesday, March 12, 2013

Mortgage finance has gone through some significant changes over the past 5 years. Underwriting standards have gotten more strict and differing mortgage programs have emerged as the best way for buyers to finance a house. In 2009, 2010 and 2011 FHA was practically the only way to get a low down payment loan to buy a house and so FHA was dominating the first time home buyer market. Over the past 18 months that has changed as FHA has more than doubled the cost of monthly mortgage insurance and Conventional financing has once again become easily possible with only a 5% down payment.

So, the question is, which is the better way for a person to buy a house with a low down payment - FHA or Conventional financing?

Well, right now if a buyer has 5% available to put down and has good credit then a Conventional loan is going to serve them a lot better than FHA. Take a look at this comparison of a $200,000 purchase price:

5% Down
3.5% Down
Base Loan Amount$190,000$193,000
Upfront Mortgage Insurance Premium (financed)$4,085$3,377
Total Amount Borrowed$194,000$196,377
Principal & Interest Payment$898$909
Monthly Mortgage Insurance Premium$0$201
Total Monthly Loan Payment$898$1,110$212

Basically, by making an additional $3,000 down payment the home buyer saves $212 per month in their house payment and has no monthly mortgage insurance premium (MMIP). Like FHA, we would do a single upfront mortgage insurance premium (UFMIP) and then would pay nothing monthly (FHA charges both upfront AND monthly PMI). The payment savings adds up to over $2,500 per year as long as they own the house!

As you can see in this example, the Conventional financing saves the homebuyer a significant amount monthly. As long as the home buyer has a little more money available to put down then it looks like the Conventional financing is the winner!

Ken Mascia, Licensed Loan Officer NMLS 135323(248) 644-1200, kmascia@primecapitalmortgage.com


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