Right now with the inventory of properties low and bidding wars happening quite often, it is worthwhile to look at the different types of financing and how they can effect whether or not you win in making an offer.
The two major types of residential financing are FHA and Conventional:
FHA loans are insured by the Federal Housing Administration and that office sets the guidelines for the loan.
Conventional loans are usually done through FNMA or FHLMC. These are acronyms for government sponsored entities that buy mortgages. They set the guidelines for conventional loans for the most part.
Each type of loan has it’s own advantages and disadvantages. It usually comes down to individual circumstances which determine the best way to go. FHA loans require less money down and allow the seller to pay a higher percentage of the closing costs. So if money is tight, FHA is more advantageous. FHA loans are also more flexible in the percentage of the buyer’s income that can go towards the mortgage payment and other debts. Additionally, the funds necessary for closing costs and down payment money can be gifted or come from a governmental entity second mortgage.
The biggest advantage of conventional over FHA financing is that conventional loans will finance vacation homes and investment properties as well as primary residences. FHA will only finance a primary residence in almost all cases. Other than that, each has advantages and disadvantages depending on individual circumstances.
One of the major advantages involves mortgage insurance. Mortgage insurance is charged by the lender for loans that have less than 20% down payment. It is paid by the buyer but it really only protects the lender in case there is a default on the loan. FHA charges mortgage insurance in two ways. 1. An upfront fee that becomes part of the mortgage and 2. a monthly charge that is paid for the life of the loan except in certain rare circumstances. Depending on the credit score, FHA mortgage insurance can be more costly and go on for a longer period of time than conventional mortgage insurance.
With a conventional loan, there are certain advantages in that the PMI will drop off by law once the borrower has 22% equity in the house and the homeowner can request that it be dropped once they have 20% equity in the property. With FHA, it will stay on as long as the loan is outstanding unless the buyer initially put down 10% or more.With very high credit scores the PMI rate will tend to be lower on conventional loans.
The major difference between the two involves the property itself and any repairs that may be required. FHA has certain minimum property standards that are more stringent than conventional loans. The biggest differences involve peeling, cracked or missing paint, trip hazards, missing or damaged handrails and rooms without heat. these are major concerns with FHA and appraisers will usually require these repairs to be done prior to closing. There can still be repairs required with a conventional loan but that is much less common. So from a seller’s point of view not having to make certain repairs can make an offer stronger.
Bottom line, there is no such thing as the “best mortgage loan”. It will depend on many factors that all interconnect to determine which type of loan is best for you.
Still have questions? Contact Bill or any member of our team to see if we can help get you on the path to home ownership!
