Mortgage Finance Blog

A couple of months ago, I wrote about the increased charges of FHA loans. We discussed the increase of the mortgage insurance premium funding fee from 1.75% of the loan amount to 2.25%.

This major change was to allow the FHA to increase its cash reserves and to create some stability within the government entity. The change still makes the FHA loan rather attractive for borrowers who do not have a substantial down payment.

However, if a borrower’s credit score is above average (700 FICO), it may prove advantageous for borrowers to save for an additional few months and go with conventional financing. Borrowers making this paradigm shift will realize a better equity position and save more at the closing table.

Let’s do that math. If we are obtaining a $100,000 loan, the closing fees using FHA financing would be roughly the same as a conventional loan except for the 2.25% funding fee.

Considering such, the FHA requires a minimum down payment of 3.5% of the purchase price.  Simple math demonstrates that after the down payment is deposited, the borrower’s equity position is merely 1.25% (3.5%-2.25%=1.25%) of the purchase price. That’s hardly any equity!

Conversely, utilizing conventional financing, the borrower is required to deposit at least 5% as a down payment. Considering that a funding fee is not incurred, the 5% equity position remains intact.

Most banks and brokers offer a slightly better rate on conventional financing than FHA. This is due to less paperwork, time, effort, processing, etc. In our example, if the borrower waits an additional month or two to save approximately $1,500 for the down payment, he/she will find themselves in a better equity position, saving more money at the closing table and making nearly the same monthly payments.
 
Is it better to obtain conventional financing and realize a greater equity position? For most, it makes more sense. It will depend on a variety of factors. Make sure that you get all of the facts of your particular scenario.

Look to your trusted lender to personalize your options and make a side by side comparison of a couple of loan programs. Such a comparison can help you feel confident that you are making the best financial decisions for you and your family.