Which is better for our situation? FHA or Conventional?

[Anonymous]

Hello,

My wife and I are looking at two homes in the NY metro area.  We hope to negotiate one house to $530k (cheaper, but needs updates) and one home to $580k (nicer, no updates).   We can afford 3% or 10% down with either, but obviously, putting 3% down leaves us with a much more comfortable safety net or more money to put into the house.

Our credit scores are over 800. 

There's a ton of information on FHA loans, but with the massive amount of info, I've struggled a bit to figure out what the difference in interest rates would be, or why we WOULDN'T want to do the FHA loan?

So far  - the only thing I can tell is the upfront insurance ($8k put back into the mortgage) AND paying mortgage insurance.  I’ve seen various claims that FHA rates are either better or the same as conventional loans, depending on the specific situation.   

From what I understand, the main negative with FHA for our scenario is:

1) the $8k additional upfront insurance

2) the fact that there's a larger mortgage overall with 3% vs. 10% down

3) and that conventional insurance goes away after you reach a certain loan-to-value ratio, but mortgage insurance for FHA is still required throughout the life of the loan?

THANKS!

Message Edited by FICOScott on 02-01-2009 09:21 PM

[SanDiegoEngineer]

A few other things:

3)  is not necessarily true - the FHA mortgage insurance is not for the life of the loan.  It is for a minimum of the first 5 years of the loan, but it can be discontinued once you reach 80% LTV after that.  Unlike conventional mortgage insurance though, it has to be 80% of the ORIGINAL valuation of the home.  Regular mortgage insurance you can get rid of once a home appreciates and is appraised at a value where the LTV is below 80%.

As I understand it, the FHA mortgage insurance premium is also typically higher than private mortgage insurance (FHA is 0.55% of the loan amount per year as the MI premium - depending on your LTV, private mortgage insurance could be lower.  With 10% down, it should probably be significantly less).

I suspect with 800 scores, you can probably get a better interest rate than with FHA as well, though the FHA rates are pretty good.

[Anonymous]

We are in California and we were comparing conventional vs FHA.  We would have gone with the conventional loan but our credit score was 3 points away from the minimum.

Conventional:

4.5% 1 point

5.0% no points

$227/month Mortgage Insurance

FHA:

5.0% .5 point

$163/month Mortgage Insurance

$6,914.25 up front MIP (1.75%)

[ShanetheMortgageMan]

You wouldn't want to do the FHA loan IF conventional is a better option for you.  Why would conventional be a better option for you?

1.  If you wanted to, and could put the 10% down (perhaps 15% down if the area in NY you are buying in is determined to be declining)

2.  Are planning on gaining a lot of equity soon, as then you could remove the PMI rather quickly as conventional will accept current appraised value (usually after 2 years) in order to show you have the equity to no longer require PMI

3.  If the home you are buying either does not meet FHA's minimum property standards or if it's a condo and is not FHA approved (nor could pass an FHA Spot Approval).

Just to name a few.

With conventional and financing more than 80% of the value will result in monthly mortgage insurance too, just like FHA.  Conventional's MI is a sliding scale depending on FICO score, LTV, and loan amount (to name just a few factors)... but a general rule of thumb is with 10% down and a 720+ score, conventional starts becoming pretty competitive with FHA in terms of overall payment.