Buyers, you have a choice: FHA versus Conventional Loans

 Working with a few of my recent buyers, I was asked if it would be best for them to obtain an FHA loan or go the Conventional route.  They wanted to know which loan would require less money out-of-pocket as well as which one would be more likely to be approved.  They also wondered how sellers viewed contracts presented with either option.  I could certainly explain to my buyers that most sellers feel more comfortable with a contract offering more money down from the buyer.  The golden offer, of course, from a seller’s perspective, is the cash offer.  However, in this economy, even when people have cash, they’d like to hold onto it and finance as much as possible.  I wanted to give my buyers the best advise regarding FHA versus Conventional, so again, I turned to my mortgage expert, Mortgage Banker, Justin Miller at Fembi Mortgage (754-214-7449). 

Justin had this to say:

 Now, more than ever, it is better to choose a Conventional loan than an FHA loan.  In the State of Florida, an FHA loan requires 3.5% down and a Conventional loan requires a minimum of 5% down.  The only problem some may run into getting a Conventional loan is that you need a minimum of a 720 credit score, and it cannot be a condo.

 The debt to income ratio requirements on a Conventional loan are more stringent, limiting it to a maximum of 41% and sometimes as high as 45% but honestly, you shouldn’t be any higher than that anyway.  Just based upon what the mortgage insurance companies are doing, you can see more liquidity is coming back to the market.  You can now get financing on attached housing in Florida and go up to 45% debt to income ratios; before no one was going over 41%. 

 With a Conventional loan, the monthly mortgage insurance is less than an FHA loan.  Typically, a Conventional loan only requires you to maintain the mortgage insurance for a minimum of 2 years AND until you have 20% equity in the property where FHA is 5 years AND 22% equity.  It is your responsibility as the borrower to contact your mortgage servicer to have it removed.

 In addition to an FHA loan having a higher monthly mortgage insurance premium, there is also a one-time Upfront Mortgage Insurance Premium (UFMIP) of 1% of your loan amount.  This does get wrapped into your loan amount but is a charge, nonetheless. 

 MGIC, one of the mortgage insurance companies, has a great illustration comparing a Conventional loan to an FHA loan http://mgic.com/education/mi_better_option.html

 I am not a real estate agent, nor do I pretend to be, but my experience has been that a seller is more inclined to accept a Conventional loan rather than an FHA loan because there is a misconception that a Conventional loan is more likely to get approved.  The only real difference I see is that the Conventional appraisal guidelines are a little less strict than FHA. 

 Both loans are good loans, but as you will see, a Conventional loan is less expensive.  Regardless, I would always suggest looking at putting less money down if you do not have a lot of money leftover after closing and if you are not maxing out your retirement.

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