FHA vs Conventional at 680 FICO

One of the more common loan comparisons for a first time home buyer is the FHA vs Conventional analysis.

When looking at the loans for first time home buyers today versus a few years ago, there are significant differences.  There were countless exotic, but dangerous, loan programs a few years ago.  The 80/20 loan, the 2/28 ARM, and others are all gone.

We’re in a 30 Year Fixed market.  The two main varieties are the FHA 30 Year and the conventional 30 Year Fixed from agencies like Fannie Mae and Freddie Mac.

In the past few years, private mortgage insurance has become more expensive and loan level price adjustments are higher for lesser credit scores.

Today, we’ll look at an example.  We’re using a $300,000 purchase price.  We’re assuming a 680 FICO score and a 5% down payment.  This triggers a 1.188% loan level price adjustment.  This is a fee charged for the 680 FICO score.

The biggest differences are as follows.  The mortgage rates are comparable.  We’re looking at a .125% difference.  At the 680 FICO, the mortgage insurance factors and loan level price adjustment lay down a one-two punch of a higher monthly payment plus a higher dollar amount out of pocket at closing.

How we do the math on these is pretty straightforward.  The cost of a mortgage is equal to how much it costs up-front plus how much it costs over time.  To be accurate, we include the financed FHA up-front mortgage insurance premium and the non-financed conventional loan level price adjustment as costs that occur immediately.

We also include the cumulative interest and monthly mortgage insurance as part of the ongoing costs.  We disregard principal in these calculations.

Over the first 10 years, the “best loan” changes one time around the second year.  The reason for this is that the FHA loan does have a large up-front fee, almost $5,000 in our example.  Over time, the cheaper monthly mortgage insurance adds up to make the FHA loan the cheaper option for the 680 FICO score and 5% down payment.

Every situation varies so contact us if you’d like a custom comparison.

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