As of today, up front FHA loan mortgage insurance is increasing from 1.75% to 2.25%. So this post will compare getting a 5% down conventional loan vs. getting a 3.5% down FHA loan.
First let’s talk about mortgage insurance, as this is the primary advantage of 5% conventional loans vs. FHA loan. The way FHA up front mortgage insurance works when you get FHA loan is you take the mortgage amount X 2.25% and that number gets rolled into your new loan balance. So let’s say you are buying a house for $300,000 and putting down the min 3.5% FHA loan down payment. That would be a base loan of $289,500. You take ($289,500 X 2.25%) =$6,513. So $6,513 is the upfront mortgage insurance with an FHA loan. So your base loan amount for your new FHA loan would be ($289,500 + $6,513) =$296,013. Additionally, FHA has monthly mortgage insurance of .55% per month. So you would take your new FHA loan amount (including the rolled in FHA mortgage insurance) of ($296,013 X .55%) =$1,628 per year or $135.67 per month. So over a 5 year period with 3.5% down using a FHA loan to buy a $300,000 house, you would pay a total of $14,653 in mortgage insurance over that 5 year period.
Now let’s look at a 5% down conventional loan. With 5% down on a $300,000 home purchase you would have a new loan of $285,000. There is no upfront mortgage insurance with conventional loans, so you loan balance would stay at $285,000. The monthly mortgage insurance on a conventional loan is .51% per month. So your monthly mortgage insurance would be ($285,000 X .51%) =$1,530 per year and $127/mo. So over a 5 year period you mortgage insurance on a conventional 5% down loan would be $7,650. So as you can see, there is a $7,003 savings over a 5 year period with a 5% down conventional loan vs FHA loan.
However the qualifying guidelines are much tougher for 5% down conventional loans vs FHA loans. You must have a 720 credit score, the max debt-to-income ratio is 45% and you need two months payments in reserves after closing. Additionally, you would have to come up with $15,000 down payment for a 5% down conventional loan vs. $10,500 for a 3.5% FHA loan down payment. FHA on the other hand you only have to have a 620 credit score, the max debt-to-income ratio goes up to 55% and you are not required to have any reserves after close. Additionally, FHA allows a gift from a relative for 100% of the down payment and closing costs.
Keep in mind that mortgage interest is tax deductible in most cases. Mortgage insurance in both cases with FHA and conventional loans can be removed once your loan balance is 78% of the value of the property. The 30 year interest rates are comparable for 5% down conventional vs FHA.
So in summary, if you have excellent credit and can qualify with your income, a 5% down conventional loan is a low down payment option to look at in comparison with FHA.
And here are some other highlights about FHA financing:
- FHA loan down payment is only 3.5% and can be a gift from a relative
- Maximum FHA loan amounts in California can go up to $729,750 in many California cities such as Los Angeles, San Diego, Orange County, San Francisco, San Jose and more
- FHA loan credit score can be 620 and still get your the best interest rates
- FHA loan interest rates are still extremely low
Give me a call (858-922-7899) or email (email@example.com) if you have any questions at all about getting approved for a FHA Loan.
Sr. Loan Officer (and FHA specialist)