Part II: 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
Last week we pointed out a few of the qualification differences between FHA
and conventional loans, as well as the fact that FHA
requires mortgage insurance even with larger down payments. Many harbor the misconception that FHA
is the primary program for low down payments for those who are not VA
-qualified. However, this concept is outdated because conventional programs exist for as little as a 3% down payment, lower than the FHA
-required 3.5% minimum down payment. Fannie Mae and Freddie Mac both offer 3% options through their HomeReady and Home Possible programs, in addition to a 5%-down option for those who do not qualify for these programs.
You will also see a much wider variety of options through conventional financing. For example, you can finance owner-occupied, second homes and investor transactions through conventional financing. FHA
is primarily for owner-occupied financing and will only allow second homes under some very stringent exceptions. In addition, within areas of the country that are not defined as "high-cost," the FHA
base loan amount of $275,665 is lower than the conforming loan amount of $424,100. Thus, in a low-cost area, for loan amounts over $275,665, your primary low-down-payment option will typically be conventional financing.
Next week we will cover additional differences between FHA
and conventional programs, with a focus upon mortgage insurance requirements and options.
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 email@example.com.
Conventional or FHA
What do FICO changes mean for mortgage customers?