FHA vs conventional loan: the real monthly cost in Clayton County

Most buyers I sit down with in Riverdale think this comes down to the down payment. FHA is 3.5 percent down, Conventional 97 is 3 percent down, so conventional must be cheaper. That is the wrong place to look. The number that decides which loan costs you less over the years you actually own the house is the mortgage insurance, and the two programs handle it very differently. Here is how the comparison works for a Clayton County buyer.

The down payment is almost a tie

On a $275,000 Riverdale home, FHA wants 3.5 percent down, which is $9,625. Conventional 97 (also sold as Fannie Mae's HomeReady and Freddie Mac's Home Possible) wants 3 percent, which is $8,250. That is a $1,375 gap.

If you are stacking Georgia Dream and Clayton County down payment assistance on top, most of that gap disappears anyway, because the assistance covers your down payment and a chunk of closing costs. Most of those stacked files here run on FHA. Stacking onto a conventional loan is allowed, but your lender has to confirm their product supports it first. So the down payment rarely decides anything. The mortgage insurance does.

The mortgage insurance is the whole game

This is the part buyers miss, and it is the part that costs or saves real money.

FHA charges mortgage insurance premium, or MIP. There is an upfront charge of 1.75 percent of the loan (usually rolled into the balance), plus an annual charge that runs 0.55 to 0.85 percent on the published HUD tables. Here is the catch that matters most: if you put less than 10 percent down, that annual MIP stays for the life of the loan. It does not fall off when you build equity. The only way out is to refinance into a different loan.

Conventional loans charge private mortgage insurance, PMI. On a Conventional 97 at strong credit, PMI often lands around 0.3 to 0.5 percent a year. And it cancels. You can request cancellation once you reach 80 percent of the home's value, and by federal law your servicer has to drop it automatically at 78 percent. On a normal payment schedule in a normal market, that happens somewhere around year 8 to 11. After that, your payment drops and stays dropped.

That difference (insurance that sticks forever versus insurance that ends) is why credit score decides this, not the down payment.

Where FHA still wins

FHA was built for buyers who cannot get a clean yes from a conventional underwriter, and it still does that job better than anything else.

• Lower credit scores. FHA goes to 3.5 percent down at a 580 score, and down to 500 to 579 with 10 percent down. Conventional 97 wants a 620 minimum, and realistically 640 to 660 to get a decent rate.
• Higher debt-to-income. FHA is more forgiving when your monthly debts run high relative to your income. Conventional underwriting is tighter.
• Between roughly 620 and 700, the PMI pricing on conventional climbs enough that FHA usually comes out cheaper month to month. So even when a buyer qualifies for both, FHA can still be the better payment in that credit band.

For a big share of first-time buyers in Clayton County, the numbers point toward FHA, and a loan officer can confirm that against your file. There is no income cap on the loan itself, and it stacks cleanly with Georgia Dream and the county assistance.

Where conventional wins

Conventional 97 pulls ahead when your credit is strong.

• At 720 and up, PMI gets cheap, often 0.3 to 0.5 percent, under FHA's floor.
• That cheaper PMI cancels. FHA's does not. Over a 10-year hold, that is thousands of dollars you keep.
• No upfront insurance charge like FHA's 1.75 percent baked into your balance.

The pattern is consistent: 720 and up, conventional usually pencils out better. Below 700, FHA usually does. In between, the crossover gets close, which is exactly why a licensed loan officer should price both against your file and put the two payments on paper before you pick one.

A worked example on a $275,000 Riverdale home

These figures are illustrative. They are meant to show how the two loans behave, not to quote your loan. Your real numbers depend on the rate you lock, your exact score, taxes, and insurance the day you apply.

Take that $275,000 home and a buyer with a 760 score.

• FHA: 3.5 percent down ($9,625), plus 1.75 percent upfront MIP added to the loan, plus annual MIP around 0.55 percent that never comes off unless you refinance. Twelve years in, you are still paying it.
• Conventional 97: 3 percent down ($8,250), PMI around 0.3 to 0.4 percent because of the strong score. You hit 78 percent of value somewhere around year 9 or 10, PMI drops off automatically, and your payment falls for the rest of the loan.

At a 760 score, the conventional column comes out ahead in this example. The starting payments might land within a few dollars of each other, but the conventional buyer stops paying mortgage insurance while the FHA buyer keeps paying it for the life of the loan. Over the years you own the home, that is the difference that adds up.

Now change one thing. Same house, same buyer, but a 610 score. Conventional 97 is off the table (it needs 620), and even at 620 to 660 its PMI would be priced high. FHA takes the 610 buyer at 3.5 percent down, and the payment is lower than a conventional loan would be at that score. FHA carries that one on these example numbers.

Same house, two buyers, opposite answers. That is why nobody should guess. A licensed loan officer runs both.

What to do with this

If you know your score, you already know which direction you are leaning: strong credit points to conventional, thinner credit or higher debt points to FHA. If you are not sure where your score sits, or you are within a few points of that 620 or 720 line, that is exactly when running both estimates side by side is worth the hour.

I go deeper on each program on its own page: the FHA loan in Clayton County and Conventional 97. Read the one that fits your situation, then have a participating lender put your actual numbers into both and see which payment is really lower for the years you plan to own the house. The first conversation is free.

I am Johnnie Benton Sr., a licensed Georgia REALTOR® with Epique Realty. I am not a mortgage lender or a tax advisor, and this article is educational, not lending or tax advice. Program rules and figures change over time, so verify your numbers with a participating lender before you rely on them. The first conversation is free.