How does mortgage insurance differ between loan products?

by Dave Hershman12 Sep 2017
Part III: I am new in the industry. I just passed my test for my license. The licensing course gave me some good knowledge, but I don't feel that it helped me advise my clients. I know you can't help me do that in your column – but I do have a specific question. What is the advantage of a conventional loan as compared to an FHA loan? It seems that some of the loan officers at my company specialize in FHA and others conventional. 

–Gerry from California


Thus far we have pointed out some of the qualification and program differences between FHA and conventional alternatives. This week we will focus upon the mortgage insurance factor. While both FHA and conventional loans can carry mortgage insurance, or MI (or MIP for FHA), we have already indicated that those who are putting down 20% would most always opt for conventional because conventional loans do not require MI at 80% LTV, while FHA loans always require insurance, regardless of the down payment. We also pointed out that FHA and conventional both have low down payment options. Thus, the question must be asked – if you are putting the minimum down, which should you select?

Each loan scenario is different. To make a choice, you must look at the base prices of the loan, the cost of insurance, the credit score and the qualification guidelines – as well as the property. But we can point out these very broad differences between conventional and FHA:
  • As demonstrated previously with regard to the program options, conventional alternatives offer more insurance options as compared to FHA. With FHA you must pay insurance upfront and monthly. With conventional, you have options that are monthly, upfront or a combination of the two. And convention MI can also be absorbed into the rate under lender-paid options.
  • Except for lender-paid options, conventional MI can be cancelled in as little as two to five years, while FHA MIP cannot be cancelled if the minimum down payment is made.
  • If you are putting more than the minimum down, the FHA MIP cost is lowered slightly. But with conventional MI, there are more solid savings with a 10% or 15% down payment.
  • FHA MIP costs do not vary by credit score, while conventional MI is more expensive for lower scores.
I did not have enough time in this column to highlight all the differences between conventional and FHA programs, but I believe we have touched upon a good portion of the salient issues.
–Dave

Dave Hershman has been the leading author and a top speaker for the industry for decades with six books authored and hundreds of articles published. His website is www.originationpro.com. If you have a reaction to this commentary or another question you would like answered in this column? Email Dave directly at dave@hershmangroup.com.

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