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FHA or Conventional - You Decide

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By : Rodney McNabb    99 or more times read
FHA stands for Federal Housing Administration. FHA loans are the Fannie Mae and Freddie Mac loans that you hear so much about. One common misconception about FHA loans, is that Borrowers think that the FHA is lending them the money. This is not true. The FHA is ‘insuring’ your loan in case of default. This is why so many lenders like FHA so much. If you default on your loan, the FHA will buy that loan back from your lender. Therefore, the lender’s risk is extremely limited.

Where does FHA get its money to purchase back these ‘bad loans’? When you take out an FHA loan, you pay insurance. You pay an up front premium of the loan amount x .0175, and monthly insurance of the loan amount x .0005. So to give you an example: Let’s say you are purchasing a home and your loan amount (not the purchase amount, but the loan amount) is $100,000. At closing, you will pay $1,750 (that’s $100,000 times .0175). Each month, you will pay an additional $50 (That’s $100,000 x .0005). You may think that sounds like a lot of money - but guess what… you are more than likely going to have mortgage insurance on a conventional loan as well - and you are going to pay an even higher rate on the conventional. The purpose of this example was to just show you how the FHA gets its money to pay off the bad loans. The FHA started out taking money from the government, but has since become self-sufficient.

Many years ago, getting an FHA loan was a pain in the butt! Additional inspections, additional costs, they take longer to process, there was more paperwork involved, it was harder to qualify for, the appraisal guidelines were more strict, etc. Now, getting an FHA loan have been simplified and the additional costs are very limited.

Let’s compare a few points between the FHA and conventional loans, and you decide:

Down Payment
FHA requires a minimum of 3.5%
Conventional requires a minimum of 5%

Mortgage Insurance
FHA is less - Conventional costs you more

Origination Fee
Loan originators (loan officers) can charge you only up to 1% for FHA, while the fee they can charge you with conventional loans is an unlimited amount.

Credit Scores
FHA ’says’ that they don’t require a minimum credit score. However, the investors are still requiring around a minimum of a 620 score to qualify. Conventional loans are requiring around a 680 score. A 620 credit score going FHA allows a Buyer to have the same interest rate as a Buyer with a 740 score going conventional.

Closing Costs
FHA keeps these costs controlled; whereas conventional can get out of control.

With FHA, you can qualify after two years, and with conventional, you must wait four years

With FHA, you can qualify after three years, and with conventional, you must wait four years.

Qualifying Ratios
FHA has higher qualifying ratios, while conventional has lower qualifying ratios.

Seller Credits
With FHA a Seller can credit up to 6% of the Buyer’s closing costs.
With conventional loans, the maximum Seller credit is 3% towards closing costs.

The maximum loan limit for an FHA loan is currently $271,050. So if you plan on purchasing a home whereas the amount is higher than that, you will need to make up for it by paying additional monies down so you can get the loan amount around $270,000ish. (you need a little ‘fluff factor’ for additional closing costs that may pop up).

Do FHA loans take longer to process and underwrite? Yes, they do… about 30 minutes longer.

Is it more difficult to qualify for an FHA loan? They are often easier to qualify for than conventional loans.

So, let me ask you. Based upon the information above, which route do you want to take?
Rodney McNabb is a part of a team ofRaleigh Realtors that offer services inRaleigh Property Management and Raleigh Short Sales.

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