Government loan or conventional loan: which is better?

When comparing a Charleston, SC conventional loan to a Charleston, SC FHA loan, which method is best? The lowest total monthly payment or the lowest total cost?

Let’s look at a $100,000 FHA loan, with a 5% rate (assuming a 5% down payment). This loan will also have a financed Mortgage Insurance Premium (MIP) of 1.75% or $1,750, making the total loan $101,750, and a monthly mortgage insurance premium of .50% or $41.66/month. The p&i payment at 5% – $546.21/month plus mortgage insurance (MI) of $41.66/month. Total payment is $587.87/mo including MIP (no escrow)

We have a conventional loan of $100,000 with a rate of 5%, the P&I will be $536.82/month and the PMI will be $78.33/month. Total payment is $615.15/mo including MI (no escrow). The FHA loan is cheaper in this example by $27.28/month, or $327.36/year, or a savings of $4,910.14 over 15 years.

Clearly, the FHA option works much better when comparing monthly payments, however, it finances a slightly higher loan amount initially. The FHA loan works much better for lower credit score loan-to-value customers because there are fewer adjustments to the credit score based on loan-to-value. In this example, both loans will be paid off in full over 30 years. Both allow loans with a mortgage insurance removal request when the loan to value reaches approximately 78% (2-year conventional and 5-year FHA minimum). With the FHA loan allowing for a smaller down payment, lower credit scores with no adjustments, and more flexible underwriting, FHA loans are gaining more market share in today’s real estate market. In the Charleston, South Carolina real estate market, FHA loans make up about 25-40% of Charleston mortgages. With underwriting requirements becoming more restrictive, these loans will continue to grow in market share.