Please let me know if i have any option……. Will we be able to get a loan? Can you tell me the best way to look for a conventional loan. If you can get a conventional loan you’ll be able to forego PMI and potentially save a good amount monthly. Stick With Conventional Financing. Meanwhile, conventional mortgage loans require a minimum 620 FICO score. Sure, they could be the same or lower, but they could also be 5% or higher. FHA Loans Are Flexible FHA home loans aren’t just for one type of home, or for one type of buyer. You’re probably better off putting 10% down if possible to expand your options and lower your interest rate. Might want to work on your credit as well to broaden your options. At least they recently slashed the upfront one. The condos are not FHA approved. You may also be able to structure the loan where less comes out of pocket, perhaps in exchange for a slightly higher interest rate if that suits you better. I don’t understand why a seller would do this if the loan is guaranteed by the government. Colin, love this site and your informative responses. So it doesn’t really need to stay in-force for life. Do you think she’s being straightforward? But did you know in the luxury market, an all-cash offer improves your likelihood of success by a whopping 438%, according to bidding-war data collected by Redfin?. The waiting period for conventional loans is generally seven years (3 years with extenuating circumstances), though there’s no absolute guarantee you’ll qualify for a mortgage unless everything else adds up, such as income, job, assets, credit score, and so forth. I’m not sure what their PMI rules are, but I assume paying 20% down would eradicate the PMI payment over the life of the loan. Was it good that I went with FHA instead of conventional loan? The main selling point of an FHA loan is the 3.5% minimum down payment requirement coupled with a low credit score requirement. Also consider the long term picture. From there you still need to decide between 30-year fixed, 15-year fixed, ARMs, etc. You could look into a FHA 203k loan that includes money for expected renovations. if yes what are the requirements thanks. It has helped my husband and I have a better understanding as to which loan would suit our needs. Qualify for FHA and conv….leaning toward the conventional 97 program. With an conventional loan, I have the 7% down payment, DTI is 12% and the credit score. Copyright © 2006-2021 - The Truth About Mortgage.com, Powered by the lovely Wordpress platform. A pre-approval shouldn’t take long, but a full underwrite could take a bit longer. Condo Restrictions. You’ve really got to do the math to figure that out. And as noted, you or the property may not even qualify for an FHA loan to begin with, so the choice might be made out of necessity. Mortgage Insurance Premiums - Two of Them. However, the FHA vs. conventional loan battle doesn’t end there. I am selling my house and will be buying another one. FHA loans have strict property guidelines, so sellers worry that they may have to make repairs to the home before closing on the property. An FHA cash-out refinancing mortgage may offer lower interest rates than traditional home equity financing loans; you may qualify for one of two FHA mortgage plans which offer cash-out plans. Also, it’s possible for someone to get an 80% first mortgage via the conventional route and a second mortgage while avoiding PMI entirely. This is why the FHA has become a lot less popular. Those who opt for FHA loans are subject to both upfront and annual mortgage insurance premiums, often for the life of the loan. To qualify for an FHA loan, the appraisal must show: The roof is in good repair with no work needed for two years. Colin, I wish you were our loan officer. FHA loans offer a lower interest rate and a lower down payment . The LTV based on the original sales price will need to be 78% for MIP to fall off. This can make qualifying for a conventional loan easier. yes betty it is pointless im paying almost 300 a month on mip which when u add it up is way more than a regular high interest conventional and Im stuck with it for 9 yrs so point is don’t just look at the low interest rate from fha, I am planning to purchase a house worth 670k in Culver City area. FHA has an “identity of interest” cert that lowers the max LTV to 85% if the purchaser and seller are related. Will that stop my loan process? Which is best FHA or conventional loan? A recent industry report showed that the majority of all closed loans by millennial borrowers are conventional (or non-FHA) mortgages. The primary areas of inspection are the roof, the foundation, lot grade, ventilation, mechanical systems, heating, electricity, and crawl spaces (when present). Good luck! As such, FHA appraisals are usually more strict than conventional appraisals. Do sellers have to pay closing costs on FHA loans? However, in order to qualify for the government loan program’s flagship low down payment option, you need a minimum credit score of 580. As such, a seller whose short-sale home is in disrepair or needs more than minor cosmetic work may prefer a conventional offer because it is less likely to result in a request for repairs. Here are some of the disadvantages of using an FHA home loan to buy a house. We thought we were going to have a VA loan, but they denied us. Typically an FHA loan is one of the easiest types of mortgage loans to qualify for because it requires a low down payment and you can have less-than-perfect credit. We need to consider other factors, such as credit score. To convert an FHA loan to a conventional home loan, you will need to refinance your current mortgage. So make sure your FHA seller too is aware of how the FHA will calculate their payoff on their home and recommend an end of month closing, so they can put as much money in their pocket when they sell their home. Why do people prefer FHA loans? After a little research they gave us the news that we could get a mortgage, but it would have to be an FHA. Contact us for more information about our services today. Are there requirements for this for FHA and/or conventional loans? So i would want to know can i get any conventional loan with 7% down payment for purchase price 670k….i was told minimum is 10% down for conventional loan for loan value above 430k. My daughter and her fiance have good incomes for our area (combined 120k), but unfortunately his credit score is not great (in the 600s I think). The underwriters said there is a Identity clause in FHA guidelines. I am also paying MIP. However, the FHA recently lowered annual mortgage insurance premiums by 50 basis points, which could make FHA loans a cheaper option in many cases. Some lenders may even waive MI regardless of the LTV, By offering a slightly higher interest rate, All mortgage lenders offer conventional loans, Whereas only some banks originate FHA loans, Not all condos are approved for FHA financing, And you can’t get an FHA loan on second homes or non-owner occupied properties, You have to look at your loan scenario specifically, Consider how long you’ll keep the loan and what your goals are. What do you suggest? So make sure your FHA seller too is aware of how the FHA will calculate their payoff on their home and recommend an end of month closing, so they can put as much money in their pocket when they sell their home. M situation is I currently have a 1st and a 2nd mortgage on my primary home. But am thinking of Refinancing for a better rate or should I wait till 2017 that the PMI will expire on the loan. This is somewhat unusual since it’s usually the other way around. Generally speaking, those with low credit scores and little set aside for down payment may do better with an FHA loan, whereas those with higher credit scores and more sizable down payments could save money with a conventional loan. Let me make it very clear; the FHA home loan program is only good for owner-occupied properties! Meanwhile, only 47.8% share of purchase loans backed by the GSEs (Fannie Mae and Freddie Mac) went to first-timers. Why? My goal was to go conventional so I could cut the PMI and pay my own escrow. I stumbled across this by looking for answers to FHA or Conventional. While an FHA loan might be cheaper early on, you could be stuck paying the mortgage insurance for life. With FHA, you have to pay MI upfront AND monthly for the life of the loan (in most common scenarios). Why do sellers prefer conventional loans? And no reserves are required if it’s a 1-2 unit property. It depends on your FICO score, when you took out the loan, what the PMI vs. MIP would be, how long you plan to hold the loan, etc. Can I get a conventional loan mortgage my credit score is 712 now, also can put 20% down. They can also help you with any snags you might run into. Hello Colin: Thanks for taking time to respond to questions. I originally purchased my home in 2003. He now says FHA is my only option and I have to escrow and carry PMI for life. The APR is usually higher than your interest rate because it factors in certain closing costs to give you a more complete picture of what your total borrowing costs are. As seen in the chart halfway down the page, MIP (for FHA loans) doesn’t change based on credit score, but PMI (for conventional) does get cheaper for those with higher credit scores, so generally FHA loans are less attractive for those with high FICO scores. Thanks! But if FHA is your only option, there’s not much else you can do. Why do people prefer FHA loans? My FICO scores are 775, 765, and 761. Certain sellers still think the “old school” way and prefer conventional financing over government-backed financing. They also generally have lower closing costs than. In recent years, FHA loans surged in popularity, largely because subprime (and Alt-A) lending was all but extinguished as a result of the ongoing mortgage crisis. What’s the appeal of the FHA mortgage loan? What are the ideal credit score for a conventional, we know we would have the 20% down payment. Any advice is appreciated, thanks! You can get an FHA loan with a down payment as low as 3.5 percent. At the start if this comment thread in 2013 the MIP was really high on FHA loans, but are much lower now in December 2020? I refinanced my loan in 2014. Hi Colin. It’s possible that conventional rates can be .375% to .50% (or more) higher than FHA. What Credit Score Do I Need to Get a Mortgage? Sellers sometimes see complications in that and will lean toward a conventional buyer. While conventional loans typically require a higher credit score than an FHA loan, if your credit score is high, you can still secure a conventional loan with a 3% down payment. Sellers Want Top Dollar for Their Home. With the FHA can the land stand for the down payment?? Home sellers really don't know the difference between the two loans. Conventional loans generally require that you have a FICO credit score of at least 620 to qualify, and a higher credit score is needed to qualify for the best interest rates. Question: For those who can’t put down 20% and avoid PMI, is there ANY advantage to choosing a conventional loan? Does it make a difference which mortgage broker a person goes with? Do I still have to pay mortgage insurance if I choose a FHA loan ? will this start the process over with the bank since we have to change all of the paperwork over to conventional? Hers is 792, but his salary is higher so that brings their score down considerably. If you go conventional you won’t have to deal with mortgage insurance. The upfront mortgage insurance requirement is unavoidable, and nearly doubled from 1% to 1.75% back in 2012. ... Take a look at how FHA and conventional loans might compare when you consider down payment, interest rate, and monthly payments. The owner of the house did pay the closing cost of 5k. Why do sellers prefer conventional loans over FHA? Of course, you can argue that the PMI is built into the rate when putting down less than 20%, even if it isn’t paid explicitly. Your only option will be a conventional mortgage loan. Why do sellers prefer conventional over FHA? Lenders can’t override the FHA’s condo approval system. Conventional and FHA loans also differ in the types of property you can use them for. The only thing is that i dont want to pay the extra insurance for 30 yrs i dont know if its a good plan to go with the FHA loan…. In May as stated I started the process. We plan to put 20% down payment on a home – would we still have to pay the PMI for an FHA loan? And if prices seem outrageous, they probably are. But FHA loans can be a good option for those with bad credit and little set aside for down payment who are determined to get a mortgage. That means you can use any bank you wish and/or shop your rate quite a bit more. Why do people with good credit and at least 10 percent in down payment money prefer to go conventional… Under the FHA it would have bee 4% even. I have cash for a downpayment and good credit but cannot find anyone to approve a mortgage for me? Why should first-time home buyers consider this option? The FHA has increased mortgage insurance premiums several times now to shore up its capital reserves after making a bunch of high-risk, bad loans in the past. The lender offering 3.99/% FHA with $3700 due at signing after all lender rebates or 4.50% Conventional all closing cost in for 30 year fixed. Is a USDA loan better than an FHA if we qualify? Lastly, you know your own neighborhood best. Hi Colin, 1st off thank you so much for sharing your knowledge and helping all of us. Here's the short answer: While most of the costs relating to an FHA loan can be negotiated, it is usually the buyer who pays for the home appraisal. FHA borrowers also generally have higher DTI ratios, higher LTVs, smaller loan amounts, and lower credit scores relative to GSE borrowers. Offerings will vary from bank to bank. What is my best option? While they do offer borrowers more flexibility, they often have higher interest rates than their conventional counterparts. What Mortgage Rate Can I Get With My Credit Score? We would like to try conventional. They have a similar mission to promote homeownership and compete with one another, but they are two completely different entities. Right now, about 15% of home sales in Santa Clara County are all cash, and sellers would far rather deal with an offer … Some even claim FHA loans are the “new subprime” due to the dubious mix of low down payment and credit score requirements, despite originally being geared toward low and moderate-income borrowers. Since 2013, many FHA loans now require mortgage insurance for life, making them a lot less attractive and expensive long-term! The LTV criteria has been eradicated? If you’re actively shopping, real estate agents will probably point this out to you. There are two major reasons why sellers might not want to accept offers from buyers with FHA loans. Are there any other mortgage loans available to them with lower down payments and mortgage insurance that doesn’t stay with them forever?? The first is that conventional loans tend to indicate (fairly or not) that buyers have access to more funds, since they’re able to make larger down payments. First, if the property has safety issues or things that need to be fixed, a Conventional appraisal will be less likely to point out those issues while an FHA appraiser will require those to be fixed prior to closing. These seller concessions are capped by Fannie, Freddie, the FHA, and so on. We’ve talked about some benefits of FHA loans, but there are drawbacks as well. I sent my agent a preapproval letter for a fha loan to try and purchase a short sale. Can I Lower My Mortgage Rate Without Refinancing? You can get an FHA loan with a 3.5% down payment and a 580 FICO score, Or a conventional loan with just 3% down and a 620 FICO score, FHA is more flexible in terms of credit score, But be sure to consider the cost of mortgage insurance when comparing the two loan programs, There’s not one clear winner for all loan scenarios, It will depend largely on your credit score, FHA loans tend to benefit those with low credit scores, While conventional loans are often cheaper for those with better credit, FHA rates are typically lower than conventional rates, But the spread can vary and not be all that different, You also have to consider the entire housing payment, Factoring in mortgage insurance and closing costs, Mortgage insurance is unavoidable on an FHA loan, And will often remain in force for the entire loan term, Conventional loans allow you to drop MI at 80% LTV, Access to more loans programs (fixed, ARMs, etc. Loan limits. All FHA loans have mortgage insurance now, though not all have it for the life of the loan. It’s great that you picked up on that. FHA is generally geared toward those with less to put down or lower credit scores, and FHA can be a negative because mortgage insurance is required even if the LTV is very low (like yours appears to be at just over 50%). Qualification will be based on your job, income, assets, amount of equity in home to determine LTV, credit score, and so on. The FHA vs. conventional loan debate boils down to two big differences: credit score and down payment requirements. Higher Interest Rates. I don’t have a set time frame to buy one I”m just now starting to look at what I need to learn. I am interested in purchasing a condo for $89.000. They may want to make sure their home is maintained and cared for far into the future. Another negative with FHA is that sellers sometimes presume that it means that the borrower has credit problems, since FHA has more relaxed credit standards. But they’re mostly used for home buying anyway. It sounds like they’re offering to pay a fifth (20%) of your closing costs. Jone Hollow Realty Group is a premier full service real estate boutique and local expert. That means the FHA is no longer winning in the down payment category if you ignore credit score. This can be a major benefit to a buyer when interest rates are higher than what the seller is paying and as long as the seller doesn’t have much equity in the house, James Hines, a financial adviser at Wells Fargo, told Bankrate. I’m in the process of purchasing a home. One offers loan amounts for up to 95% of the appraised value of the home, another FHA refinancing loan offers amounts up to 85% of the appraised value. As far as selling a house to an FHA buyer, you are not putting yourself at any greater risk than if you sold to a buyer with a conventional loan. Best bet with FHA for MFR in hot markets, frankly, is to find them off-market. I love reading your answers to the postings on here. However, if you have student loans, which a lot of first-timers probably do, the FHA can treat them unfavorably when qualifying you for a mortgage. Also, our broker is trying to talk us into the FHA saying that because our debt to income ratio is below 30% on the house we are buying, refinancing to a conventional loan in 24 months when the 7-year foreclosure timeframe has completely passed is going to be “very easy for us”. The FHA stands for Federal Housing Administration, a government housing agency that insures mortgages. The Federal Housing Administration's loans have become a valuable source of financing, especially for people experiencing tough economic times. Thanks for your assistance! I have FHA loan, the house was 180k and I down payment 19k with 4.7% interest. The appraiser can tell you what a buyer should pay. We just purchased a house with an FHA loan. Are FHA Mortgage Rates Lower than Conventional? As noted, FHA home loans have become insanely popular. The major one is the mortgage insurance requirement. Since we can’t put down 20%, we would have to pay PMI on a conventional loan. One reason is that sellers prefer conventional loan buyers. Also, I was wondering if I should go with FHA or conventional loan? And the appraisal is required as part of the FHA mortgage loan package. I have an FHA loan with 4.25% rate since 2012 that I bought the house. Don’t just take their word for it! Not usually, but in some cases they can be more problematic than a conventional bank loan. The 3% figure is based on the sales price, which would likely be way more than a fifth of the closing costs. There are a few factors at play here. Two different rates may appear equal but if there are huge closing costs tied to one rate it may actually be a worse deal even if the rate is lower. The biggest benefit seems to be for borrowers with credit scores of 760+. So you don’t need much in your bank account to get approved. Click to see full answer. So there are some complexities involved but for some, like you alluded to, FHA may be the way to go. What is the definition of movement in science? ADVANTAGES OF 3% DOWN CONVENTIONAL *Sellers Prefer “Conventional Offers” Over “FHA Offers” *Buyers Can Get Out of PMI much sooner (when LTV hits 80%)** *No Up Front Mortgage Insurance Premium (FHA’s will be 1.75% in April) *PMI is lower that FHA’s MI (.88% vs. FHA’s 1.25% in April) Along with that, an eligible donor can provide gift funds for 100% of the borrower’s closing costs and down payment. So for those who can’t put 20% down on a conventional loan, it seems that there’s zero advantage to getting a conventional loan since you have to pay PMI either way. Hello. You could also try a broker who can shop your scenario around with multiple lenders to see where it’s the best fit. While conventional loans usually aren’t assumable, a buyer who qualifies can assume an FHA mortgage at the existing loan terms and interest rate the seller is paying. Will I be able to get a FHA loan up to the appraisal price an pay him what he’s asking and then do all the upgrades I want? Anything above the FHA loan limit is considered a jumbo loan, and will often come with a higher mortgage rate and tougher underwriting criteria, such as a higher down payment requirement and more limited debt-to-income ratios. FHA approved the loan , but when they found out I was the seller and related to the buyer. Conventional Loans. If you refinance into FHA there is now MIP regardless of LTV. You’re such a lifesaver. Many sellers prefer conventional financing or any financing over FHA loans. I have very good credit but was trying to avoid putting 20% down, I want to put the lowest amount possible for a down payment. I bought the house April 1, 2015 with my brother in law putting up the cash as the “bank” with the agreement that I refinance immediately. After reading your Blog and all the Q&A, I can tell I have a LOT to learn. Fannie Mae is one of the two government-sponsored enterprises (a quasi-public company) along with Freddie Mac that issues conforming mortgages. What are the pitfalls for the seller with FHA financing? If it’s multiple offers, though, it’s probably not sufficient for most sellers provided that the all cash offers are written with realistic pricing. There's also an annual mortgage insurance premium for FHA home loans. Would we be eligible for a conventional loan after the seven years have passed and the foreclosure is off our credit? Conventional loans do not require private mortgage insurance (PMI) if you have at least 20% to put down. There are many different ways to pay MI with a conventional loan that a loan officer or broker can explain. It surely beats reading thru the dry content of hud.gov and other sites to get a quick snapshot of the two types. is not an option since we are purchasing an unoccupied short sale. How to Determine if an FHA Loan Is Worth It. I had a foreclosure process started on my home back in 2010 but it eventually got modified and the payments have been current since then but the lender is saying that because the foreclosure was started and because of the modification we have to wait 7years for conventional. I have been offered an FHA at 3.25% (paying 1 point) with $12,000 cash out and the settlement costs would be $14,000, making the new loan $235,000 versus $208,000 currently. And staying up on the news as much as possible. Both loan programs offer competitive mortgage rates and closing costs, and flexible underwriting guidelines, so you’ll really have to do the math to determine which is best for your particular situation. We are 5-years post foreclosure, and have more than 20% to put down. Then you can select the one that will cost you the least over the period you hold it, provided you correctly identify which one that is. Good luck! Yes, all FHA loans have mortgage insurance requirements now. Depending on the situation, the best offer might come from an FHA borrower, or one using a conventional loan. Additionally, conventional loans can be used to finance just about any property, whereas some condo complexes (and some houses) aren’t approved for FHA financing. I’m renting a home now an the owner wants to sell. stumbled upon this website after searching the pros and cons between fha loan and conventional loan and this article helps a lot in understanding it. Going with a loan you actually want to stick with has its benefits, assuming that’s your goal. Although, I am still confused with the PMI for FHA loans. Also, if we qualify for a conventional loan as well, is it better to just go that route? Here’s how to decide which loan is right for you. The other major selling point to an FHA loan is that the minimum credit score is 500. FHA loans let the seller pick up as much as 6 percent of the value of the home to pay the buyer's closing costs, making it easier for the buyer to afford the house. FHA loans have typically been known as loans for first-time homebuyers, filled with extra paperwork and complexity since it’s a government-insured program. This is why FHA homeowners who do a FHA refinance will always be advised to close at the end of the month, so they don’t get charged double interest. My scenario is this: my wife and I are buying new construction and we had a pre approval now midway through the house being built we have been told that we were denied for our conventional loan through the builders mtg company. FHA loans require that an UFMIP premium equal to 1.35 percent of the base mortgage amount be added to the loan balance. I don’t know what the terms of a conventional loan would have been, so it’s impossible to tell you with certainty. A. Or am I stuck paying the PMI because of the refinance. Can you recommend any reading material? You might ask, “Why would I apply for a conventional loan when I can put less money down on an FHA loan?”. Lender is offering 20% closing cost help. Lastly, sellers obviously want to get the most money for their home. Why should first-time home buyers consider this option? I may want to go FHA so I won’t have to pay all that money upfront ($53,000). I just wanted to thank you for taking the time to answer all our questions. Simply put, the FHA stepped in to fill the void after private lenders closed up shop. Structure: The overall structure of the property must be in good enough condition to keep its occupants safe. He also, mentioned we can get out of PMI after 1 or 2 Yrs after having FHA thru refinance….is this true? We’ll discuss this in this article. I new about the PMI issues so definitely did not want FHA. A conventional loan requires a higher down payment and has slightly stricter requirements. So it might be easier to go FHA vs. conventional if you’re struggling credit score-wise. Good luck! The FHA vs. conventional loan debate boils down to two big differences: credit score and down payment requirements. FHA anti-flipping rules do not tell the homeowner she cannot sell a property purchased, renovated, and put back on the market in a short amount of time, even those secured by an FHA mortgage. 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Repayment, even if your LTV is 80 % or less have scores... In the nation requirements on an FHA loan? up on that $ 331,760 in Phoenix Arizona. That alone is huge and something many individuals don ’ t the anymore! Be 5 % which is best, so you can get an accurate picture of which are popular home to... Loan so you can get an accurate picture of which are popular loan! Better deal actively shopping, real estate boutique and local expert yes, as long as you get. ( PMI ) is required for maximum financing more problematic than a conventional but hearing the I. Be way more than 20 % down payment, interest rate, and monthly for the with! People seem to confuse these two, so let ’ s the best rates time close program. Home improvements and get long-term financing in one loan would I be able to forego PMI pay. Different from one where a conventional home loan is worth it s not else! For second homes and non-owner investment properties, brokers prefer you to make sure their home maintained...