There is a lot to consider when buying a home. One question I often hear is how to choose between an FHA or conventional mortgage. To better understand which loan would be best suited for someone, it is helpful to review a few factors that go into the different types of loans that are offered.
Whereas FannieMae and FreddieMac (Fannie and Freddie), the two conventional lenders, have risk-based adjustments due to credit score, and more specifically on transaction type, FHA is more lenient when it comes to lower credit scores. FHA will still have a very attractive interest rate, even if the borrower’s credit score is in the higher 600’s, whereas Fannie and Freddie start adjusting the rate when the credit score goes into the lower 700’s.
I’ve heard many people say, “I don’t want to get an FHA loan because I have heard the
appraisals are more like home inspections.” This is not completely true. Yes, FHA will check
certain things to ensure that the homeowner does not have unexpected bills within months or
even a year after moving in (old roof, struggling HVAC, handrails missing on stairs, chipping/peeling paint, wood rot, cracked concrete stairs, low water pressure, etc.), however, many of these are considered health and safety issues and will ALSO be pointed out on a conventional appraisal.
With Fannie and Freddie, if a borrower puts down the minimum 5%, they are allowed to ask the seller for 3% of their closing costs to be paid. With FHA, the borrower only needs to put down 3.5% and the seller is allowed to pay up to 6% of their closing costs.
Fannie and Freddie will only charge mortgage insurance if the loan is higher than 80% loan to value, whereas, in most cases, FHA charges mortgage insurance premium (MIP) on their loans. Fannie and Freddie do not offer mortgage insurance directly, they accept mortgage insurance from the various independent mortgage insurance vendors that have been vetted.
Refinance/Cash out refi:
FHA could be a great option for someone with a lower credit score (under 700 as an example) who is looking to cash out for debt consolidation or other reasons. FHA is much less sensitive to credit score, regardless of transaction type (purchase, refi, cash out refi). The drawback with an FHA loan is that the monthly mortgage insurance premium is on the higher side and typically stays on the loan. If you have a good deal of equity (20% or more) and a high credit score, conventional could be your better choice as there will be no monthly mortgage insurance.
At the end of the day, your Mortgage Loan Officer, will look at all the data points for each person’s specific transaction and help guide them to the financing best suited for their short- and long-term needs. There is a lot to navigate when buying a home. Working with an experienced mortgage loan officer, like those at Univest Home Loans, can help guide you through the process and determine if a conventional loan, FHA loan or another financing option is best for you. Contact us today at 877-723-5571 or email@example.com to have a conversation about your unique needs.
Univest Bank and Trust Co. is Member FDIC and an Equal Housing Lender. NMLS #415882