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Frequently Asked Questions (FAQs)

Federal and State Disclosures

Loan Programs

UP2 FHA vs Conventional

At first glance FHA rates look much better than conventional rates. However, these low rates are misleading.

The fact of the matter is that although FHA provides lower rates at the same or similar cost when compared to conventional financing, the mortgage insurance premiums are much higher for FHA financing, resulting in a higher payment on the FHA loan with similar cash to close requirements.

The following table illustrates why FHA is the last choice among various financing options with less than 20% down.

PMI MIP Matrix
 

As you can see, the FHA (Column 1) interest rate of 3.875% is much lower than either the Conventional Loan with Monthly PMI (Column 2) or the dual-loan "Piggyback" option that eliminates PMI entirely.  The Cash to Close is similar for all three options.  But take a look at the Monthly Mortgage Insurance line on all three options.  The FHA loan has a monthly mortage insurance payment of $299.05, way more than twice what the monthly PMI is on the Conventional Loan.  And the best option is the third column which has the highest rate of the three, including a much higher rate on the second lien loan, but the lowest payment due to the fact that the monthly mortgage insurance is totally eliminated.

In the final analysis, either of the two conventional options will be a better option than the FHA loan.  However, for applicants with median credit scores below 660, the FHA loan may be the only available option since the conventional loan options will both require a minimum credit score of 660.

For more information on mortgage insurance types and payment options and on avoiding PMI through the use of a "piggyback transaction" read our Guide on Mortgage Insurance.