FHA vs Conventional

Mary Beth H.:                    Hi. This is Mary Beth Harrison with Dallas Native Voice, and I’m sitting here with Jason Dickson with Integrity Mortgage. And I have the question of the hour for you. We had to do this. Throw this out here. I’m just going to throw a question at you.

Jason D.:                              All right.

Mary Beth H.:                    FHA versus a conventional loan. Why would I do one over another? Give me the pros and cons-

Jason D.:                              To both.

Mary Beth H.:                    Yes.

Jason D.:                              Okay, so let me set it up to say conventional. If you qualify for a conventional loan, whether that’s 5% down, they also have a 3% down. To compete with FHA, three and a half percent. Conventional loans are cheaper. Okay. Conventional loans can have mortgage insurance, but that mortgage insurance can drop off. When you get to-

Mary Beth H.:                    That’s really important.

Jason D.:                              When you get to get that equity point of 20%, that’s key. So now let’s compare that to FHA. Why would someone go FHA over conventional? Well, because they don’t qualify for conventional, typically.

Mary Beth H.:                    Okay, so is there a break there in a credit score. How does that work?

Jason D.:                              It depends. I would say general rule of thumb, if you’re below 660 on a FICA credit score, FHA might be the easier route where you don’t have bumps and bruises getting underwritten and approved, if you can be approved for conventional.

Mary Beth H.:                    Right and FHA was created to begin with to allow more people to get into home ownership.

Jason D.:                              That’s right.

Mary Beth H.:                    Not to put them in debt, not to make things harder for them. But for so many people, you’re already paying substantial rent, which could easily convert into a mortgage for a home. And so, that was the goal of FHA to start with. And so it’s 3.5% down-

Jason D.:                              That’s correct.

Mary Beth H.:                    … for an FHA loan.

Jason D.:                              Minimum.

Mary Beth H.:                    But you’re telling me if my credit score was good enough, I could do a conventional loan and put 3% down.

Jason D.:                              That’s right. And there’s another caveat because there’s two types of conventional, 3% down. One is just the standard 3% down. Your MI, it’s a little bit higher because the coverage is a higher coverage amount. So that’s a downside, but it can come off. While FHA, you’re MI stays there forever until you refinance it.

Mary Beth H.:                    And MI and PI, it’s mortgage insurance premium or private mortgage insurance. The private mortgage insurance is on a conventional loan. MIP is what we call it, is on a FHA loan and that extra payment, sometimes hundreds, $200 added to the payment goes for forever. So if you keep that loan for 30 years, you’re making that additional payment for forever. Whereas, once you do a conventional loan, either the appreciation has gone up on your home, your payments have come down and there’s a 20% gap there.

Mary Beth H.:                    You’re able to get rid of PMI and it’s after the first year, isn’t it?

Jason D.:                              Yes. I mean, after the first year and for example, in our market, homes are appreciating so quickly.

Mary Beth H.:                    Exactly.

Jason D.:                              I mean, mortgage insurance is falling off for people with conventional loans with MI within a year to three years. It’s unbelievable.

Mary Beth H.:                    And some of our clients are getting appraisals that are higher than their sales price. So they bought the house at 300,000 but at appraised for 310 they already have some built-in equity there just to start with, which is great. And so, getting it into that 20 percentile in the year, it’s not an impossible feet.

Jason D.:                              That’s right. And I don’t want to demonize FHA because it’s a great loan product.

Mary Beth H.:                    It is a great loan product.

Jason D.:                              If you have bumps and bruises on your credit, the rates are phenomenal. You just have that mortgage insurance premium. It’s high, it’s expensive. But if it’s your best option, it is what it is. And it’s better than renting.

Mary Beth H.:                    Right, and eventually you can refi, refinance that loan. Turn it into a conventional loan, and thereby getting rid of MIP then. So there’s ways to get around it. But if you can start off the process with a conventional loan-

Jason D.:                              It’s better.

Mary Beth H.:                    … I just think it’s always a better move for our clients.

Jason D.:                              Agreed. One, a lot of lenders, they’ll push FHA. Because, unfortunately, some lenders are paid more by originating FHA mortgages over conventional. So you want to make sure you’re working with a lender that’s going to explain to you the differences and give you the options and let you know, “Do I qualify for both and why would you prefer or suggest professionally that I go with FHA over conventional or vice versa?”.

Mary Beth H.:                    That’s interesting. I did not know that. Huh. Learn something new every day. Well, thanks for listening. If you want any more information about this, you can go to our website at dallasnative.com or to any social media we go where you go. And thanks so much.

 

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