FHA vs Conventional 97: Which Costs Less Each Month?

FHA vs Conventional 97 at a glance

A monthly-cost example using the same purchase

The following example is illustrative. It is not a current rate quote or approval estimate.

Shared assumptions

• Home price: $300,000

• Loan term: 30-year fixed

• Illustrative interest rate: 6.50% for both loans

• Property taxes and homeowners insurance: excluded because they are assumed to be identical

• FHA down payment: 3.5%, or $10,500

• Conventional 97 down payment: 3%, or $9,000

• Illustrative FHA annual MIP: 0.55%

• Illustrative conventional PMI scenarios: 0.40%, 0.80% and 1.20%

Estimated loan components

In this example:

• Conventional 97 costs less when PMI is approximately 0.40%;

• FHA costs slightly less when conventional PMI is approximately 0.80%;

• FHA costs materially less when conventional PMI is approximately 1.20%.

Actual payments can differ because FHA and conventional interest rates may not be equal, mortgage insurance pricing changes, and the financed FHA upfront premium increases the balance on which interest is paid.

Why credit can reverse the result

Conventional pricing and PMI can respond strongly to credit profile, loan-to-value ratio, debt-to-income ratio, property type and other risk factors. Two borrowers purchasing the same home can therefore receive different conventional monthly costs.

FHA uses its own insurance structure. A borrower whose conventional PMI quote is expensive may find the FHA combination more competitive. A borrower with stronger conventional pricing may find that Conventional 97 provides a lower payment and a clearer route to remove borrower-paid PMI.

The comparison should use the mortgage score and underwriting result used by the lender. A consumer credit score displayed by a bank or app may not be the score used for the mortgage application.

How long mortgage insurance lasts

FHA mortgage insurance

For FHA case numbers assigned under the current post-2013 framework, annual MIP duration depends on the original loan-to-value ratio and mortgage term. A typical 3.5% down FHA purchase begins above 90% LTV, so annual MIP generally remains for the mortgage term unless the borrower later pays off or refinances the loan.

An FHA loan beginning at 90% LTV or below can have a different MIP duration. The lender should identify the applicable MIP percentage and duration in writing.

Conventional PMI

For many conventional loans covered by the Homeowners Protection Act, a borrower may request PMI cancellation when the principal balance is scheduled to reach 80% of the home's original value, subject to the law's conditions. Automatic termination generally occurs later, commonly when the scheduled balance reaches 78% of original value and the loan is current.

Rules based on current value, property appreciation or an investor's servicing policy can differ. “Twenty percent equity” is therefore a useful shorthand, but the servicer's written requirements determine the actual cancellation path.

Compare the complete payment

Request the following items for both loans:

1. Principal and interest;

2. Monthly FHA MIP or conventional PMI;

3. Property taxes;

4. Homeowners insurance;

5. HOA charges when applicable;

6. Any temporary buydown and the payment after it ends;

7. The loan balance after any financed upfront fee;

8. The estimated cash to close.

The lower initial payment can still carry a higher long-term cost. Compare the payment now, the payment after any temporary feature ends, and the amount of insurance expected over the period the buyer plans to keep the loan.

Three situations that can change the starting path

FHA may deserve closer review when

• The file fits FHA's credit and underwriting framework more readily;

• Conventional PMI or risk-based pricing is expensive;

• The borrower can manage the FHA payment and understands the MIP duration;

• The property meets FHA requirements.

Conventional 97 may deserve closer review when

• The file receives favorable conventional underwriting and PMI pricing;

• A 3% down structure preserves useful cash;

• The borrower values the potential path to remove borrower-paid PMI;

• Income, property, occupancy and transaction rules fit the selected conventional program.

Neither comparison is complete until cash to close is reviewed

One option may have a lower monthly cost and require more cash at closing. The other may preserve more cash but carry a higher monthly insurance charge. Review both measurements before choosing a starting path.

Questions to ask for both Loan Estimates

• Are both estimates based on the same home price, loan term and closing date?

• Is the interest rate locked, floating or merely illustrative?

• What is the monthly mortgage insurance amount?

• How long is mortgage insurance expected to remain?

• Is any upfront mortgage insurance or other fee financed?

• What lender credits or discount points are included?

• What is the annual percentage rate?

• What is the estimated cash to close?

• Does either estimate contain a temporary buydown or adjustable feature?