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One of the common misconceptions about FHA home loans is that they cost significantly more than other conventional mortgage options. When compared to other subprime, conforming, Alt-A, and even A-paper lenders, the mortgages originated by FHA approved lenders can be surprisingly cheaper than most often assume. The main limitation of the Federal Housing Administration used to be the rather outdated loan limits of the past. But with the recent modernization of loan limits, the FHA program has advanced significantly in the last year.

Are FHA Home Loans More Expensive Than Conventional Mortgages?

Although the Federal Housing Administration has gone through several updates in the last year, many still assume that FHA home loans must cost more than other conventional mortgage options. Mainly due to the FHA's required mortgage insurance premium (MIP), borrowers often expect the closing costs and finance charges to be much more than a traditional lender backed by Fannie Mae or private investors. Surprisingly, strict loan limitations actually used to be the biggest disadvantage of FHA home loans, and not the added insurance premiums. Fortunately, the recent modernization of conforming loan limits have also affected loans originated by FHA approved lenders--thus more than leveling the playing field, and making FHA loans even more competitive.

Making Sense of FHA's Mortgage Insurance Premium

For most FHA mortgages, borrowers can expect to pay an upfront mortgage insurance premium (MIP) of 1.75% of the loan balance at closing, and an annual premium of .55% paid in monthly installments. However, borrowers must also remember that the initial costs and additional monthly costs of a conventional home loan can be much larger when considering the several advantages offered by the FHA. FHA-approved lenders impose fewer bad credit 'add-ons', and they offer more flexible loan to value ratios and smaller down payment requirements. On the other hand, conventional lenders often charge higher upfront costs, add surcharges to the loan for the type of property, credit scores that aren't perfect, and higher loan-to-value ratios. As a result, borrowers who choose an FHA mortgage may pay less upfront and get a competitive interest rate as well.

More importantly, with the recent tightening of credit, some borrowers may not even qualify under conventional lending guidelines. To protect the FHA's integrity, approved lenders still require full documentation of total household income, available assets, and the ability to manage debt. So for borrowers looking for a cheap and fast loan without any proof or financial means, the FHA should not be confused with the convenient subprime lending of the past.

To help compare a FHA home loan to a conventional mortgage option, a local FHA mortgage lender can easily help calculate the numbers. Since the FHA only insures mortgages, several of these FHA-approved lenders may even offer conventional loan products of their own. When comparing the two types of mortgages, a mortgage professional can explain the specific requirements of the FHA and offer a more detailed breakdown of the required insurance premiums.


Heindrick So
Heindrick So is a mortgage consultant at a local Bay Area Real Estate Brokerage--specializing in residential wholesale lending. Heindrick frequently contributes to various finance columns, ranging from home loans and mortgages, debt management, and other personal finance topics.