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FHA or 5% Conventional

So I've been wracking my brain over this, but still can't come up with a satisfactory answer on whether to go with the FHA or 5% down Conventional.The terms that I've received from the lender are:FHA - $212,000 purchase price, borrow $201,400 (5% down) + $3,524.50 (UFMIP) = $204,924 total borrowed, 3.5% rate = $920.2 (P&I) per mo., MI = $204.93 per mo.5% Conventional - $212,000 purchase price, borrow $201,400 (5% down), 4% rate = $961.51 (P&I) per mo., PMI = $112.45 per mo.I've ran the numbers and I see that in the long run FHA would save more money. I also see that the conventional route would cost less in the earlier months, however the FHA would still more than make up for it on the back end.The hangup I've had is that the conventional can allow for dropping PMI earlier than the FHA loan would drop MI. According to my math (which may be way off), it looks as if the breaking point would be about a year and a half - where if I could drop PMI by that time before the point I would be able to drop MI with an FHA, then it would be worth it to go the conventional route. Does this make sense? The question is, how likely is it that I would be finished paying off PMI compared to paying off MI for an FHA? I realize county appraisals aren't everything, but the appraisal this year on the home was at 254k with the purchase price of 212k. So I really don't want to miss the opportunity of saving money by not going with the conventional, however if I end up paying PMI for the entire period then it would be better to go FHA.Thoughts? by drf016 from St. Louis, Missouri. Jun 6th 2012 Reply


William J Acres (William_Acres)
#1 ranked lender in Arizona - 8,369 contributions

My suggestion would be to go Conventional, and here's why... After one year, you can have the home appraised, and if you have 20% equity or more, you can have the PMI dropped. With FHA, you will pay MI for a minimum of 5 years.. no exception... and there's no guarantee that they will drop the MI... it is not automatic.. I have clients here in AZ where they have paid MI on their loans for 7 years, and FHA will not drop it.. with FHA they are supposed to drop it when you pay down your mortgage to 78% of the original loan amount, but somewhere in the small print, they state that it has to be approved... meaning it's not a guarantee they will drop it.. Also, with conventional, it's possible to pay a onetime payment upfront for mortgage insurance, and you won't have to pay monthly.. And, some lenders allow you to finance that up front premium just like FHA... If you're dealing with a competent loan officer, he should be able to show you all these options.. if you're dealing with the local big bank, it's likely they don't offer this type of product, or the loan officer/application assistant isn't aware of such a product.. so The best advice I can give you is to contact a LOCAL mortgage broker, not the local "Big" bank, and certainly not one of those 50 states internet lenders...By applying with your LOCAL Broker, you have an advantage because he's familiar with local customs and works with numerous lenders, seeking out the best loan terms for your particular scenario. Because he has lower overhead, he can offer you lower rates and lower fees than most of the larger lenders.. I'm a Broker here in Scottsdale AZ and I only lend in Arizona. If you or someone you know is looking for financing options, feel free to contact me or pass along my information. 480-287-5714 WilliamAcres.com

Jun 6th 2012
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Joe Metzler (JoeMetzler)
#2 ranked lender in Minnesota - 3,721 contributions

If you have the 5%, and are OK with the 5% down payment, conventional is the way to go. There is another conventional option you haven't mentioned that is even better. It is 5% down conventional WITHOUT monthly PMI. Contact a local licensed loan officer, and ask them about a one time up-front single premium option. If they don't instantly know what you are talking about, hang up and call someone else. We do these all the time and every client takes it, usually saying "How come no one else talked to me about this option!" In MN or WI, visit www.MortgagesUnlimited.biz

Jun 7th 2012
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Donald LaPlume (dlaplume)
#6 ranked lender in New Hampshire - 47 contributions

Hi DRF016,I agree with William's answer as he covered all the points I would, especially about using lender paid mortgage insurance on conventional. What I would like to add is that the average mortgage lasts for 4.9 years. You may purchase a new home down the road, refinance or maybe not. However, the majority of people do. So when you are factoring costs please really consider how long you will be in your new home. If you could move or refinance in less than 30 years you must factor that into your savings model.Wishing you all my best,Don LaPlumePS I serve the MA, NH, VT region in person and would be happy to assist anyone you know in this area. www.mortgageprofessordon.com

Jun 7th 2012
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robert brown-farley (brofarops)
#14 ranked lender in Missouri - 15 contributions

LETS CUT TO THE CHASE: FHA Why? Think of all the "potentials" you pointed out. There may be some "potential" pluses going conventional but are willing to gamble your money, your home, your families roof on "potentials?" And is a "potential" year or so difference in payoff in 30 worthy to maybe versus a defined line in this case. You have done the math and you know the answer and you see the difference and you are telling us but are you telling you? Run the numbers through our calculator http://tiny.cc/bfoms ... And feel free to contact us.

Jun 6th 2012
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Michelle Curtis Loan Originator NMLS 401173 (EmbassyFundingLLC)
#28 ranked lender in New York - 2,238 contributions

You are the only one that can really answer this question. There are a lot of factors, how long do you think you will be in this home, is the county appraisal/assessment higher than what an actual appraisal would be that you would have to have done a year from now. It would definitely be a gamble. All the best, Michelle

Jun 6th 2012
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Thanks to everyone for the responses. To JoeMetzler, the upfront premium payment is the way we were planning on going, but in order to pay that (~$5000) we would be stretched a little too thin. I'm going to see if it's possible / worthwhile to finance that, but I think we're leaning Conventional regardless. Thanks again.

Jun 7th 2012
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Dennis Sauerwein (stlmortgagerates)
#11 ranked lender in Missouri - 20 contributions

I have several clients that we offer a single premium payment of around 2% and the pmi is paid off no monthly at all. With FHA upfront MIP now at 1.75% it is about the same with no monthly. Then we advise our clients to take the pmi monthly savings and make additional principal payments. This will pay the loan off faster saving you thousands of dollars in compounding interest. If you would like for a detailed analysis email me at dsauerwein@usa-mortgage.com

Jun 7th 2012
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Ralph Richard Guertin (ralph@absolutelowrates.com)
#1 ranked lender in Florida - 676 contributions

Gun to my head conventional and shop for a rate lower than 4% with someone from our panel, a lot of good people hear

Jun 7th 2012
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Joe Shamie (Joe Shamie)
#4 ranked lender in New Jersey - 1,412 contributions

FHA....What everyone here failed to mention is that even though you can get a conventional approval up to a 95% LTV, that approval will CONDITIONED upon you ability to OBTAIN the PMI. This means that not only will your loan have to be underwritten by the lender, it will also have to undergo a separate underwriting process by the PMI compnay. Since they are a private company, they are under NO OBLIGATION to write the insurance policy. In addition, the rate you are being given is probably coming off a STANDARD rate card issued by the PMI compnay. If there is anything about the loan, value, credit, etc. they discover that they "dont like" the rate can change or the PMI denied. FHA is the safer bet.

Jun 7th 2012
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Ken Baltes (kbaltes)
#16 ranked lender in North Carolina - 242 contributions

The FHA interest rate will likely be a little lower and also the aproval process much smoother and (with out a review appraisal) . Yes, FHA monthly MIP is required, but can be disputed after 5 years and an equity position of 22%. Good Luck.Ken Baltes

Jun 7th 2012
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