The Mortgage Journey  Home

Conventional or FHA Loans In Phoenix

How does one decide between a FHA loan or Conventional loan?  In a nutshell, if you can qualify for a Conventional loan, go for it.  Conventional loans are harder to qualify for but well worth it.

The main reason for this rational is the Mortgage Insurance associated with a FHA loan.

Mortgage insurance  is an insurance policy which compensates lenders or investors for losses due to the default of a mortgage loan. Mortgage insurance can be either public or private depending upon the insurer.

For example, suppose Ms Smith decides to purchase a house which costs $150,000. She pays 10% ($15,000) down payment and takes out a $135,000 ($150,000-$15,000) mortgage on the remaining 90%. Lenders will often require mortgage insurance for mortgage loans which exceed 80% (the typical cut-off) of the property’s sale price. Because of her limited equity, the lender requires that Ms Smith pay for mortgage insurance that protects the lender against her default. The lender then requires the mortgage insurer to provide insurance coverage at, for example, 25% of the $135,000 ($33,750), leaving the lender with an exposure of $101,250. The mortgage insurer will charge a premium for this coverage, which may be paid by either the borrower or the lender. If the borrower defaults and the property is sold at a loss, the insurer will cover the first $33,750 of losses. Coverages offered by mortgage insurers can vary from 20% to 50% and higher.

To obtain public mortgage insurance from the Federal Housing Administration, Ms. Smith must pay an upfront mortgage insurance premium (UFMIP) equal to 1.75 percent of the loan amount at closing.[1] This premium is normally financed by the lender and paid to FHA on the borrower’s behalf. Depending on the loan-to-value ratio, there may be a monthly premium as well, of 1.35%. The United States Veterans Administration also offers insurance on mortgages.[2]

On conventional loans, the borrower does not have an up front mortgage insurance  (UFMIP) and borrowers pay mortgage insurance only if the the ratio of loan amount to propery value )LTV) exceeds 80% and the premiums are lower than than those on FHA’s.

To sum up, it is almost always better to go with a Conventional loan over FHA loan if you qualify.

 

 

October 31, 2013 by · Leave a Comment

Related Posts

About Patrick

My name is Pat and I have been a member of Signature Home Loans since 1993. I have experience in all facets of the mortgage industry including Manufactured Homes, Conventional, FHA Mortgages, VA Mortgages, Jumbo Loans, Investor Loans, Reverse Mortgages and Second Mortgage Loans.

Leave a Comment