FHA vs. Conventional loan mortgages? (1 Viewer)

[Joel Mack]

Can anyone explain, in layman's terms, the difference between the two? I know that in an FHA loan your down payment can be as low as 3% whereas a convential loan requires 5%. What else is there?

 

[Bill Catherall]

FHA requires an inspection. If the inspection reveals certain flaws (structural, roofing, etc.) they will require the home owner fix it or they won't supply the loan. This is for your protection as a buyer, but can really break a deal. When we bought our house just over a year ago we were also getting an FHA loan. The inspector found problems with the roof (no leaking or anything, just improperly installed resulting in a void warrenty). FHA wouldn't fund the loan unless we could find a roofer to certify it for 2 years. Of course nobody would. Finally we were able to locate a (corrupt) roofer that certified it without even looking at it and FHA funded the loan.

With a conventional loan an inspection is optional.

 

[Jason Handy]

I think the loan rates are different as well. When my wife and I were applying for a mortgage, our agent gave us rate quotes for the FHA and conventional loans. I think the conventional loans were about a quarter-point lower than the FHA.

Jason

 

[LDfan]

I also think that FHA requires you to have PMI (primary mortgage insurance) too which adds another $100 or so bucks to your payment depending on the cost of your house.

FHA is typically designed for the first time home buyer.

Jeff

 

[Bill Catherall]

Anytime your loan amount is greater than 80% of the home value (at the time of purchase) then you'll have PMI. Even with a conventional loan.

 

[ken thompson]

FHA loans are all about the 3% downpayment. Outside of that its a bad deal.

 

[Jason Handy]

Outside of that its a bad deal

I don't think that is a fair assessment. The whole point of FHA is to allow more people access to homeownership. I agree that if you have the choice, then conventional is the way to go, but some people do not have a choice. In that situation, ANY mortgage is better than renting.

Jason

 

[Steve Peterson]

Current FHA rules are such that no matter the size of the down payment, you will have to pay FHA's version of PMI. Even if you put down 25%, you get socked with the PMI. There are also fees that the seller of the house have to pay to FHA no matter what. (I know, because I sold my last house to a young couple who were going FHA and ended up paying $600 of FHA fees out of my pocket.) FHA loans are aimed at the first time home buyer.

Steve "Sucks, but true." Peterson

 

[Van Patton]

Well I am familiar with the appraisal business because my dad is one on residential houses and to qualify for an FHA your house has to be under 90-100K, I think. When the appraiser comes out and sees the house he must make sure that everything is fixed before the loan goes through such as railings on steps, wires properly placed, paint chips, etc. I personally wouldn't recommended going this route.

 

[Bill Catherall]

to qualify for an FHA your house has to be under 90-100K

That's not the case everywhere. It probably depends on the area, if there is a maximum. I'm not even sure there is one. FHA funded our first house at $175,000. Then last month we refinanced and decreased our interest rate, got rid of PMI, and got back about $4,000 in overpaid PMI to FHA. The new loan is just a conventional loan.

Steve - Good point about the seller's responsibility towards a buyer using an FHA loan. I forgot about that. When we bought our house the seller put so much of their own money into the deal that they were practically paying us to buy the house from them. It was a sweet deal for us, but hey, they didn't have to sell to us. They could have backed out anytime.

 

[Jason L.]

Bill,

Are you sure about getting rid of PMI by refinancing an FHA loan into a conventional one? On most loans, the mortgage company will tack on the PMI onto your loan and there is no way to avoid it.

This is what I believe is true about PMI and FHA loans.

1. FHA requires PMI on all loans. It doesn't matter if you have %20 or not. I heard this is because the FHA got hit with a lot of bad loans a while ago and now requires it.

2. FHA wants the PMI up front, but most banks will allow you to roll it into the monthly payment.

3. It doesn't matter if you make it to the %20 mark, the PMI does not go away with FHA loans.

The reason I went with an FHA loan is because I purchased a condominium. A lot of banks are scared as hell of condominiums and some want as much as %25 down.

 

[Bill Catherall]

Jason - Yes. Since our new loan is conventional and it is also less than 80% of the value of the home (at the time of refinancing) there is no PMI applied to our new mortgage payments.
Here's what happened with our FHA loan, as much as I can remember:
The actual purchase price of the house was $169,000. We didn't have a down payment, so our mortgage broker worked out an FHA loan for 97% of the purchase price and a second morgage for 6% (to cover the 3% downpayment and closing costs...thus 103% or $175,000). The sellers also payed some of the closing costs per FHA requirements. We had to pay (out of pocket) an ernest money deposit and a home inspection. I can't remember, but I think the ernest money deposit might have been reimbursed after closing, I'm not sure. Part of the closing cost was a very large PMI payment up front as well as 1 year (or more, I think) of home owners insurance. But all of that was rolled into the second mortgage.
So last month we refinanced and the new appraisal came in at $250,000. The new loan covered both mortgages and closing costs, so we paid nothing. Our monthly payments decrease because we are getting a better rate now. We got reimbursed for the PMI that we paid up front (overpaid). And we have 20% equity in the house...no PMI (again, because it's a conventional loan). We also got to skip one month's payment.
FHA loans are for people that have little or no downpayment. Closing costs are also less because the sellers pay some of it. If you can afford a 5% downpayment and closing costs then there's no reason to use FHA. So even if FHA does tack on PMI to loans with 20% equity it doesn't matter...you'd be out of your gourd to use FHA when you can make a 20% downpayment. Or if you have that much equity there's no reason you can't refinance and get rid of the PMI.

 

[SteveA]

There are ways to avoid PMI if you put down less than 20%. I know because I just closed on a house last Friday with 5% down and no PMI. How? You get what's known as a combo loan. I got an 80-15-5 combo. I got one mortgage for 80% of the loan at 6.875% with no PMI. Then I got a 15% second mortgage at 8.375%. Even with the higher rate on the second loan, my payments are still less than a single mortgage with PMI would have been. AND the extra interest in tax-deductible, while PMI is not.

As an added bonus, my 2nd loan is only for 15 years. Once it's paid off, my monthly housing expense will drop.

Lenders these days are even doing 80-20 combos (no money down). PMI is a total, complete sucker's deal. Call a few lenders and ask about 80-15-5, 80-10-10, or 80-20 combos and see for yourself.

 

[Jason L.]

Aren't FHA loans a good resource for people with bad credit? Someone once told me that you could get a FHA loan with a bankruptcy on your credit report.

 

[MickeS]

We got an FHA loan because we didn't have money for a down payment on a regular loan, and neither of us had very good credit. Yes, there is PMI on it, but according to our lender it goes away after 20% is paid off. Someone in a previous message says that's not true. I don't know who's right. Either way, if I had enough to put down, I'd go with a regular loan. If my alternative was to keep renting, I'd try for an FHA loan.
There is a limit to how much you can borrow on an FHA loan, but the limit varies from city to city, depending on housing costs. In San Diego right now the limit for a single-family home is a little over $260,000, but here in Tucson it's just under $145,000.
There is more information at http://www.hud.gov
/Mike

 

[Ashley Seymour]

We need a good FHA underwriter to jump in here because there is a not if misinformation going out.

Unless FHA has changed their policies recently, here are some of the things you can and can't do with FHA.

You cannot borrow the down payment or borrow over 97% for the loan. You can have parents gift money for the down.

Conventional loans seem to have an almost infinite number of ways that loans can be structured. FHA has their policies set in rules and regulations that you can get through your local HUD office.

PMI insurance (called MIP on FHA) does suck, but when FHA is the only game in town you have no choice. The up front MIP fee is not 1.5% (which can be financed) and an added premium of .5% is added to the payment each month. Payment or an appraisal below 80% has no bearing on the MIP.

Credit criteria are still pretty stringent on FHA. After a CH-7 bankruptcy you are generally required to wait three years and demonstrate the ability to handle new credit and show a good reason for the bankrupty (medical bills are good for this). Then you still have to qualify by having debt ratios of no more than 29% for the housing portion of your gross income and 41% for the total of all of your bills.

FHA does not require an inspection on the house. They do call for an appraisal that is to determine whether the house will support the amount of the loan plus down payment requested and that the collateral (house) is sufficient to secure the loan. The requirement that the house meet FHA standards is really a benefit for the buyer. If the house is a real fixer upper, then FHA has a nice rehab program, called 203K that will lend for the purchase and the total of cost of fix up and put everyting into one 30 loan, at a small premium over normal FHA rates.

Conventional lenders for years shunned FHA type buyers. Lately they have agressively sought this type of business and FHA is seriously considering shutting it's lending program because conventional programs are meeting the same need and are offering more flexible packages.

The total of FHA loans used to run about 35% of all lending. The loan limits tracked with the median price on homes in an area and this is why the lending limits quoted above vary so much. Calif is of course much higher than Tenn. Here, our limits are around $133,000. When you see that only half the properties sold can even qualify for FHA, then it is easy to see that 70% of the loans below the median level were FHA. Add to this that about 7% of home loans are VA and government participation in home finance has always been pretty substantial.

In our state they have a program for first time home buyers that offers a rate of about 1% below the FHA rates. Currently you can get an IHFA, Idaho Housing and Finance association for around 5.95%. It can be attached to FHA, VA, or conventional. The lender just uses the credit criteria for the loan and the funds come from IHFA. Good for young couples getting started, but bad as they move on because the home can't be used as a rental.

There is nothing inheritantly good or bad about any loan program (and we haven't even looked at ARM loans), but a buyer should look at their need and make an informed choice.

 

[Jason Handy]

ARM loans

Lets not touch that with a 10-foot pole. Anyway, with interest rates so low these days, the ARMs can't compete with the 15- and 30-year fixed.

My wife and I did the 80-10-10 last April (80% primary, 10% secondary aka equity, 10% down payment)

What many people fail to realize when they do this combo mortgage is that the secondary mortgage often precludes the opportunity to get a home equity line of credit. This is OK for my wife and I since we can afford to pay it off sooner than the 15 year term. But if you are planning to follow the term of the mortgage, you won't have that flexible spending available.

Jason