But first, as a reminder, here is Gerry's question: "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." 

In the previous column, I pointed out some of the qualification and program differences between FHA and conventional alternatives. Now I will focus upon the mortgage insurance factor. While both FHA and conventional loans can carry MI (or MIP for FHA), I have already indicated that those who are putting down 20% would almost always opt for convention because conventional loans do not require MI at 80% LTV, while FHA loans always require insurance regardless of the down payment. I 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 I 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 up-front (typically financed) and monthly. With conventional, you have options that are monthly, upfront or a combination of the two. And conventional 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 highlight all the differences between conventional and FHA programs in this column, but I believe I have touched upon a good portion of the salient issues. I might add that, with the Administration’s focus on fair lending and recent reports of solid financial performance of the FHA insurance fund, many are predicting changes from FHA this year.

What might these changes be?

• A lowering of mortgage insurance costs
• Ending the “mortgage insurance for life” requirement
• Risk based pricing for mortgage insurance

While these are speculative, there is a good chance that the changes, if introduced, will increase the popularity of FHA lending in the future. 

Dave Hershman is Senior VP of Sales of Weichert Financial and the top author in the mortgage industry. Dave has published seven books, as well as hundreds of articles and is the founder of the OriginationPro Marketing System and Mortgage School – the online choice for expert mortgage learning and marketing content. His site is www.OriginationPro.com and he can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..