FHA vs. Conventional Loan Calculator

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FICO:	720 and above 700-719 680-699 660-679 640-659 620-639 619 and below

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Loan Type:	Conv FHA	Conv FHA
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Related posts

• FHA vs Conventional Revisited
• FHA vs Conventional – Up-front Costs
• FHA vs. Conventional 700 & 680 FICO
• FHA Interest Rates Back to 5%
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Securing an FHA mortgage is about to get more expensive.

The FHA announced Wednesday that it is making a few policy changes to reduce their overall risk.

It will mean tougher approvals and higher costs to secure a mortgage approval for those who wait.

As listed in the official announcement, there are 3 major guideline updates for the FHA:

1. Upfront mortgage insurance premiums are increasing to 2.25% from 1.75%
2. Minimum 10% down payments for those with less than a 580 FICO
3. Seller concessions are being limited to 3%, down from today’s allowable 6%

The FHA has also appealed to Congress to raise an FHA borrowers’ monthly mortgage insurance premiums.   The reason the FHA vs Conventional comparisons keep favoring FHA is that the premiums are so low.

It’s clear that the Federal Housing Administration needs to clean up their portfolio and yet balance their mission of creating affordable mortgage loans.

They are also going to start improving the quality of their lenders.  They are introducing a “termination clause” to attack the problem where it starts.  Should certain lenders represent a disproportionate number of the bad loans, they will lose their right to originate FHA loans.

As a result, home buyers can expect tougher FHA underwriting in 2010.  This won’t be as much due to the guideline changes, but more due to the “termination clause.”  For lenders to prevent being the “bad lender,” they will add overlays to insure that they do not have a disproportionately bad portfolio.  Examples of this already exist:  The FHA will allow 580 FICO scores, but nearly all lenders require at least 620 FICO.

The new guidelines don’t go into effect until spring, but acting now will save the up-front mortgage insurance premium monies plus lock in today’s monthly mortgage insurance payments before those too get more expensive.

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We’ve had every piece of bad news that mortgages could hear:

1. The economy is rebounding.  We’re seeing expansion in nearly every key metric.
2. Housing is on a roll.  This also has negative signals for the FHA interest rates.
3. Inflation is starting to creep up.  Inflation equals higher rates.

Still, after all of this bad news and after losing 11 of the last 15 trading sessions, the FHA mortgage rate is still at 5%.  That’s surprisingly great news.

We’re still looking at an odd scenario where the rate is 5% for FHA vs Conventional rates at 5% as well.  That conventional rate requires a 740 FICO for the best rate.  For a buyer with a 700 FICO score, it is actually cheaper to get the FHA loan.  That’s significantly different than just a few years ago.

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• FHA Loan Rate Hovers at 4.75%

Today, we’re looking at the 4.75% 30 Year Fixed Rate.

On October 16th, the discount points required to buy the loan down to 4.75% was 1.82%.

As of today, it’s…..0.000%.

This is a staggering 182 basis point run in just 45 days.  On an average loan of $250,000, this is a whopping $4,550 in reduced closing costs to end up with the same low FHA loan rate of 4.75%.

We’re currently at the best rates of all time.  Even one year ago when conforming rates dropped, the FHA vs Conventional comparisons were not this even.  We’re now only seeing a spread of .125% between the two rates and the comparisons increasingly favor FHA when either of two conditions is true:

• Credit score is below 720
• Down Payment is less than 10%

Under either scenario, you’re looking at sub-5% rates but long-term savings typically lean towards the FHA programs.

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FHA vs. Conventional

We’re going to look at another comparison.  We’ll focus on a 700 FICO score, 5% down payment, and we’re assuming a single-family residence.  We’ve used a price of $300,000 for both examples.

Monthly Payment

In terms of monthly payment, the FHA mortgage nearly always is cheaper for the 700 FICO score borrower.

This is largely because the PMI is .94%.  That should be read and referred to as a percentage.  Since the FHA PMI is only .5% in this scenario, the conventional loan’s effective rate is roughly .3% higher.  The Conventional PMI is .44% higher and the interest rate is .125% lower.   Jump to the end of the article for the full data.

Total Cost Over Time

When we look at the total costs over time, FHA starts out worse.  It has the up-front mortgage insurance premium whereas the conventional loan has the smaller loan-level price adjustment.  Net: Conventional better at day 1.

Somewhere between year 4-5, the FHA loan begins to outperform the Conventional loan.

FHA vs. Conventional – Cash to Close

We again see a significant difference between these two loan.

FHA has a much larger up-front mortgage insurance premium, but it is financed into the loan.  The Fannie Mae or Freddie Mac loan will have a loan-level price adjustment.  This is a fee.  The conventional loan must pay this up-front or accept a higher mortgage rate.

Presuming it is paid as a fee to secure these low rates, then the conventional loan has a one-time, .75% fee, or $2,138.  That is how much more money the conforming loan needs to bring to the table.

Monthly Mortgage Payment Calculations

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Today’s example uses a $300,000 home at 5% down.  The FHA mortgage rate won’t change, nor will the monthly mortgage insurance.   Here’s a look at the data:

This isn’t abnormal.  The FHA vs. Conventional comparison will typically yield a lower payment on the FHA loan.

The costs related to the loan over time are the incremental costs (either UFMIP or LLPA adjustment) plus any monthly mortgage insurance plus cumulative interest paid.  Principal is not included under these calculations nor are any costs that do not vary based on loan selection.

When we look at the total savings for FHA vs. Conventional using both FICO scores, the loan options begin to separate.  At the time of closing, both conforming loan options are significantly less expensive than the FHA Up-Front Mortgage Insurance Premium.

In the beginning of Year 2, the FHA vs. Conventional winner for a 680 FICO score is the FHA mortgage.

For the period between years 2 and 5, for the 700 FICO, the conventional loan will outperform.

Should the FHA continue the moratorium on the risk-based up-front mortgage insurance premiums, it appears that the 700 FICO range is a tipping point for which loan, FHA or conventional, is better.

Related posts

• FHA Interest Rates Back to 5%
• FHA Interest Rates Almost 2 Points Lower
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• Rates Sell Off Today

I sat down yesterday to run the numbers again. It was November 1. The last post was August 27. We’ve seen the GDP jump. We’ve seen the Fed’s mortgage backed security purchase program begin to wane. We’ve seen housing numbers come in hot and housing supply dwindle.

The numbers were the same.  The 30 Year Fixed Conforming was 5%. It was also 5% for the FHA interest rate.

Recap of the last FHA vs Conventional Comparison (see the prior post for the full numbers):

• Monthly Payment:  FHA wins.  Lower due to the lower monthly mortgage insurance component.
• Total Cost:  The FHA is a worse option for about the first 24 months due to the up-front mortgage insurance cost.  After that time, it outperforms the Conventional loan.

FHA vs Conforming Over 10 Years

There was one point that was not addressed well in the old post:  The same FHA monthly mortgage insurance that is lower on a monthly basis is also permanent.  Unlike PMI, it doesn’t go away at 80% loan-to-value (or 78% on a refinance transaction).  The FHA “PMI” survives the life of the loan until it is either paid off over many years or paid off at once via a refinance.

A 95% loan reaches 80% loan-to-value just short of ten years.  So, we’ve expanded the comparison from five years to ten.

The downside to FHA remains the same.  There is a large up-front mortgage insurance cost.  FHA is the lesser option for the first two years. The upside to FHA remains the same.  The total cost of the mortgage is lower from years 2-10.

The FHA loan is almost $15,000 cheaper over 10 years. That presupposes that there is no decision between now and 2019.  A relocation from a job, an empty nest, a growing family, or a winning lottery ticket could all change the financial choices.

Who wins the FHA vs Conventional comparison?  The person who selects the loan more appropriately tied to their financial future.

Related posts

• FHA vs Conventional – Up-front Costs
• FHA Mortgage Calculator
• FHA Interest Rates Back to 5%
• FHA Interest Rates Almost 2 Points Lower
• Changes to FHA Home Loan Approval Rules