I am new in the industry. I just passed my test for my license. The licensing course gave me some good knowledge, but I don't feel that it helped me advise my clients. I know you can't help me do that in your column – but I do have a specific question. What is the advantage of a conventional loan as compared to an FHA loan? It seems that some of the loan officers at my company specialize in FHA and others conventional.
–Gerry from California
You are spot-on with regard to your observation regarding the purpose of the licensing course. You will learn a lot about the laws and some very basic mortgage knowledge, but little to help you succeed and really help clients. Your question is a good place to start, and I am sure you have about a thousand more – but we will have to start with question one.
There are many differences with regard to FHA vs. conventional loans. The qualification standards are different. So are the loan products available and the costs such as mortgage insurance. For example, if someone is comparing a 30-year fixed FHA loan to a conventional loan, the product difference is mostly eliminated. On the other hand, there are other factors that come into play. For example, the down payment being made and the customer’s FICO score may dictate which is a better choice.
To illustrate, if their FICO score is 590, your investor may not make a conventional loan at that level, but may approve an FHA loan. On the other hand, if the client is putting 20% down, there will be no conventional mortgage insurance but FHA mortgage insurance would still be required. Thus, very low scores tend to go FHA and larger down payments almost always go conventional – though this is an over-simplification. Even if you were putting 10% down, conventional would likely win out because conventional mortgage insurance is cancelable within two to five years under certain circumstances, whereas FHA mortgage insurance must be charged for at least 11 years (at 10% down) or forever (less than 10% down).
There are other FHA and conventional differences that could come into play, and I will cover some of those next week.
Dave Hershman has been the leading author and a top speaker for the industry for decades with six books authored and hundreds of articles published. His website is www.originationpro.com. If you have a reaction to this commentary or another question you would like answered in this column? Email Dave directly at firstname.lastname@example.org.
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