FHA vs. Conforming

Their are a couple of differences in cost between an FHA loan and a conforming loan that you need to know about. They both involve mortgage insurance.

With an FHA loan you will pay an up front mortgage insurance premium of 1.75% of the loan and a monthly premium of .55%. With a conforming loan you will not pay up front mortgage insurance and your monthly mortgage insurance will range from .34% up to 1.2% depending on your loan to value and your credit score.

So to explain: If you are doing a $200,000 loan at 97% with a credit score of 725 you would pay: ***assuming 6% interest rate

FHA:

Up front mortgage insurance = $200,000 * 1.75% = $3,500.

This amount will not come out of your pocket, it will be added to the loan amount. So if your maximum loan amount is $200,000 you total loan with up front mortgage insurance will be $203,500.

Monthly Mortgage Insurance = .55% *$200,000 = $1,100/12 = $91.67.

So you will pay $91.67 in monthly mortgage insurance. This amount will be added to your payment every month. This amount is required for 5 years after which it may be taken off if your loan to value drops below 78%.

Total payment = $1,311.76

Conforming:

Up front mortgage insurance = Nothing.

Monthly mortgage insurance = 1.1% *$200,000 = $2,200/12 = $183.33.

So you will pay $183.33 in monthly mortgage insurance. This amount will be added to your payment every month and can be taken off whenever your loan reaches 78% or less.

It is at the lenders discretion how long you are required to keep this.

Total payment = $1,383.43

So the FHA loan will give you a better payment, but will have a little higher loan amount. This was a very simple example and would have many other factors in the real world. You would most likely not qualify for a 97% loan on the conforming side and you would have to do an FHA, but this will give you a good idea of what the differences are on the cost side.

Check out http://www.hud.gov/offices/hsg/fhahistory.cfm for more detailed info regarding FHA loans.

Also check out http://www.thebriteway.com/ for your refinance and purchase needs.

Have a great day!