First Time Home Buyers
Mortgage FHA or Conventional
Which is Better?
As Members of ActiveRain, we have opportunities to learn from many people every day. Our AR Members come from many different disciplines. Brokers, Agents, Mortgage Lenders, Home Inspectors, Real Estate Attorneys, Home Stagers, Copywriters, Technology Consultants, SEO Consultants and ... The list is long and very comprehensive.
For this post, let’s ask several AR Member Mortgage Lenders the same question:
What circumstances guide you when deciding whether to offer a Buyer a Conventional Loan
or an FHA Loan for their home purchase?
The answers come from John Meussner, Joe Petrowsky, Jon Sigler and Rob Spinosa. Please “meet” them by visiting their AR profiles - click the link at their names above.
Rob Spinosa - Marin County, California (His own website.)
“Simply put, when confronted with this dilemma, I view Conventional as a loan of choice and FHA as a loan of necessity. I go FHA when I must, and if there is a choice between the two, then again, I would use Conventional and avoid the onerous FHA MIP.
“The two most recent cases where I’ve used FHA have required debt ratios above 50%, so conforming was out. In one case, the buyers had not yet sold their current home and had to carry both (at least for a few weeks), pushing their DTI above 50%.
“In the second case, we had first-time buyers where their parents helped them significantly with their monthly expenses. These are things we cannot adequately document for a loan approval, thus the debt ratio looks higher to a lender than it feels to the borrowers. Again, this one is an FHA deal because with a 5% down payment, the conforming parameters would be too restrictive.
“FHA was a GREAT option and for a while it really earned its stripes. But with the usurious increase in MIP implemented in 2013 (along with its life-of-loan term), I work to find an alternative if it exists. I’m hoping Congress gets this right in 2015 and FHA again becomes a viable program for the first-time buyer.”
Jon Sigler, Hartford County, Connecticut (His own website.)
“Many factors guide Borrowers to the right loan. It could be the rate, their credit, an underwriting guideline, or property condition. Conventional loans generally have lower mortgage insurance costs, but generally have a higher interest rate than an FHA loan.
“We must evaluate which option is best for the Borrower’s situation. Borrowers who have a lower credit score may need to use an FHA loan because the Conventional option is not available to them.
“Maybe the Borrower has a co-signer, or is looking at a condo which is not FHA approved, or buying a home from a relative. Maybe they are buying a home which needs a little TLC. The whole of a Borrower’s situation guides us to the perfect loan for them.”
John Meussner, Costa Mesa, California (His own website.)
“These days, when I advise clients, FHA is used almost exclusively as a backup plan due to a low FICO score or a high debt/income ratio. FHA issues approvals at lower FICO’s than conventional loans will. Rates for those lower FICO scores are also far more competitive with FHA. FHA will also issue approvals to less than perfect files with debt/income ratios in the 54% range. Anything over 45% debt/income is pretty tough to get through conventional automated underwriting systems.
“Some other things that occasionally make us look at FHA are the need for 6% sellers assistance with a low down payment, and the exclusion of deferred student loans from debt/income ratios (if deferred 12+ months from closing).
“Almost always these days, though, going FHA means there are some credit issues or a high debt/income ratio.”
Joe Petrowsky, Eight States, including Connecticut & Florida (His own website.)
1) I need to review credit - depending on the credit scores, one solution may
be a better answer. Lower scores push the answer toward FHA.
2) I need to understand income, FHA will allow a much higher debt ratio.
3) I need to understand down payment and dollars available for closing costs.
If there is a larger down payment a Conventional loan may be the right
solution. There the cost of mortgage insurance will be less than FHA.
If 20 percent is available, no mortgage insurance is necessary. With FHA,
there is always a charge, not matter the amount of the down payment.
4) For a conventional loan, lender paid mortgage insurance is an option, but
not the case with FHA.
5) FHA will allow some collection items to remain unpaid, not the case with a
Conventional mortgage.
6) FHA will allow seller paid closing costs while 3% is the maximum with a
Conventional loan.
7) Interest rates on FHA loan are currently about half a percent less than interest
rates for conventional mortgages.
Atlanta Homes ODAT Realty will continue the Mortgage Questiuons series for First Time Buyers over the weeks to come. Thanks for stopping by!
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