Conventional vs FHA Loans
in Arizona

When buyers start the process of getting pre-qualified, they often hear their loan officer throw out statements like these …“In your case a Conventional loan would be best because you have a large down payment” OR… “In your case a FHA loan is going to best for you because your credit scores are in the mid 600’s”. Many buyers want to understand the difference between a Conventional and a FHA loan. What is the advantage of one program over the other?

The debate whether a borrower is better off with a Conventional VS FHA loan changed drastically on 4/1/2013. FHA announced that they were increasing their mortgage insurance premiums (MIP). AND just a couple of months later, on 6/3/2013 FHA announced a policy that would keep FHA mortgage insurance permanently on a most FHA loans. You can go to our FHA page to learn about FHA mortgage insurance cancellation rules. Borrowers, at that point, began looking at conventional loans for an alternative.

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Borrowers have always been attracted to the FHA loans due to the low down payment requirement of 3.5%. For the buyer who is short on down payment funds, but can afford the monthly MIP, this loan fits. Conventional loans with comparatively lower interest rates will require a 5% down payment. That’s only another 1.5% down vs. the FHA competitor, and just might end up saving borrowers quite a bit of money in the long run.

Let’s take a look at some of the criteria for each of these loans and who they are better suited for.

FHA loans are typically better suited for:

  • Borrowers who are in need of a smaller loan amount. See my FHA loan page to find what current FHA loan limits are.

  • Borrowers with credit scores less than 700

  • Borrowers who have less than 5% down payment and no reserves

  • Borrowers who need a gift for the down payment and/or the closing costs and prepaid taxes and insurance

  • Borrowers who have a past foreclosure between 3 and 7 years old – (conventional loans will not allow it)

  • Borrowers who have a past short sale between 2 and 4 years old – (conventional loans will not allow it)

Conventional loans are suited for:

  • Borrowers who are in need of a larger loan amount. See my conventional loan page to find conventional loan limits.

  • Borrowers who have saved a minimum of 5% down payment PLUS closing costs and prepaid taxes and insurance.

  • Borrowers with higher credit scores, the higher the credit score the lower the interest rate and costs the borrower will have.

  • Borrowers who have never had a foreclosure OR if they have, it must be at least 7 years or older.

  • Borrowers who’ve never had a short sale; if they have, it generally requires that it be at least 4 years or older.

Comparison 1: Borrower has credit score >760 and puts 5% down on each to compare apples to apples

 Conventional 30 Year FixedFixed 30 Year FHA
Sales Price$ 300,000$ 300,000
Down Payment5%5%
Interest Rate3.875%3.250%
Financed Upfront MI$ 0.00$ 4,987
Loan Amount$ 285,000$ 289,987
Principal & Interest Payment$ 1,340$ 1,262
Taxes$ 150$ 150
Homeowners Insurance$ 60$ 60
Mortgage Insurance$ 85$ 201
HOA Payment$ 0.00$ 0.00
Total Monthly Payment$ 1,635$ 1,637
Down Payment in $$ 15,000$ 15,000
Total Closing Costs - ALL FEES$ 2,600$ 2,600
Total Cost of Points$ 0.00$ 0.00
Prepaid Taxes, Ins., & Interest$ 1,500$ 1,500
Estimated Cash to Close$ 19,100$ 19,100

Notes:

  • The Conventional loan is the clear winner in this case

  • FHA MI is more expensive and on for life of the loan!

  • FHA loan payment is $38/month more

  • Conventional mortgage insurance is potentially eligible to removed after 2 years under certain circumstances.

Comparison 2: Borrower has a credit score of 660 and puts 5% down on each to compare apples to apples

 Conventional 30 Year FixedFixed 30 Year FHA
Sales Price$ 300,000$ 300,000
Down Payment5%5%
Interest Rate4.990%3.250%
Financed Upfront MI$ 0.00$ 4,987
Loan Amount$ 285,000$ 289,987
Principal & Interest Payment$ 1,528$ 1,262
Taxes$ 150$ 150
Homeowners Insurance$ 60$ 60
Mortgage Insurance$ 308$ 201
HOA Payment$ 0.00$ 0.00
Total Monthly Payment$ 2,046$ 1,637
Down Payment in $$ 12,500$ 12,500
Total Closing Costs - ALL FEES$ 2,600$ 2,600
Total Cost of Points$ 0.00$ 0.00
Prepaid Taxes, Ins., & Interest$ 1,500$ 1,500
Estimated Cash to Close$ 19,100$ 19,100

Notes:

  • The FHA loan is the clear winner in this case.

  • The FHA loan payment is $373/month lower

  • Even though the FHA loan has upfront mortgage insurance of $4,987 it would essentially be a break-even in 14 months ($4,987 divided by the monthly savings of $373). So, that is a very quick break even.

  • This second analysis of the Conventional vs FHA loan shows that the Conventional mortgage rate is quite a bit higher, due to the low FICO score.

  • The conventional mortgage has increased well beyond the FHA mortgage insurance amount.