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Conventional Vs FHA – Should I Get an FHA Loan?

Maximum FHA Loan Limit

The maximum loan amount for an FHA Loan is often less than for a conventional mortgage.  Depending on the purchase price you are considering, you may not be able to borrower as much money as you need through FHA financing. The maximum FHA Loan limit is determined by the county the property is located in.

Click Here to Search for the Maximum FHA Loan Limit by County.

Can I Qualify for a Conventional Mortgage?

Another consideration when determining whether an FHA loan or a Conventional Mortgage is right for you is whether you can qualify for a conventional mortgage.

  • Conventional Mortgages typically will have lower closing costs, a lower total monthly payment and easier appraisal/property approval guidelines.

  • FHA Loans, while more costly in terms of Up-Front Fees and total monthly payment, are easier to qualify for, and provide access to a greater cross-section of borrowers.

Total Monthly Payment and Closing Costs

FHA Loans typically offer equivalent to better interest rates than similar credit qualifying conventional mortgages. But, all FHA Loans will have Mortgage Insurance, which often make traditional conventional mortgages preferable to FHA loans if you can qualify for a conventional loan as the total monthly payment on an FHA loan will be higher than the corresponding monthly payment on a conventional mortgage.

  • Why are FHA Mortgage closing costs and total monthly payments typically higher than equivalent conventional mortgages?  In two words – Mortgage Insurance.

What is FHA Mortgage Insurance?

Mortgage Insurance is an insurance policy lenders are required to take out on FHA loans to offset the increased risk of default associated with these loans.

All FHA Loans contain 2 types of Mortgage Insurance:

  • UFMIP:  Upfront Mortgage Insurance

  • Also referred to as Upfront MIP

  • Upfront Mortgage Insurance is collected at closing.

  • Upfront Mortgage Insurance = 1.7% of the loan amount.

  • For Example: A Loan Amount of $200,000 will have an Upfront Mortgage Insurance Premium of $3,400

  • $200,000 X 1.7% = $3,400

  • Upfront MIP is not directly paid by the FHA borrower at closing.  It is financed.

  • HUD recognizes that FHA borrowers’ often-times have limited available money for down-payment & closing costs.  As a result, the Upfront MIP is charged, but then financed into the total loan amount so the FHA borrower does not have to come out of pocket with the money. Below is an Example:

Purchase Price = $250,000

Minimum Down Payment of 3.5% = $8,750

Loan Amount = $241,250

Upfront MIP of 1.7% of Loan Amount = $4,101.25

Total Loan Amount = Loan Amount + Upfront MIP = $245,351.25

  • Monthly Mortgage Insurance

    • There is a second Mortgage Insurance on FHA Loans.

    • This Insurance is paid monthly as part of the monthly mortgage payment.

    • Monthly MI is paid for the life of the loan.

    • It will never disappear or fall off the loan.

      • **This is an important consideration when deciding whether to elect for a traditional conventional mortgage with MI or an FHA loan.

      • The FHA loan will always have mortgage insurance no matter how much equity you accumulate in the property either by appreciation or by paying the loan amount down.  Whereas with a conventional mortgage the Mortgage insurance falls off once the loan amount is paid down to 78% or the original purchase price on a Primary Residence.

      • What is the rate used to calculate FHA Monthly MI?

      • The standard rate is typically _____ but this depends on factors such as LTV, credit score, etc.

FHA Property & Appraisal Requirements & Flips

  • FHA requires more vigilant review of the Property and Appraisal/Appraised Value than is required under conventional mortgage guidelines.

    • Defects noted on the appraisal are often required to be corrected.  i.e. Broken tiles, holes in walls, etc.

    • The Underwriter must review Flips and increases in value carefully.

  • What is a Flip?

    • A flip is when a property is purchased, then shortly later sold at an increase in value.

    • FHA loan guidelines require 90 days to pass from the date a property is sold before it can be sold again.

      • The Rule is that the new contract cannot be signed until the 91st day after the prior sale was completed.

  • Appraisals are associated with the property.

    • Appraisals are associated with a property via an FHA Case # that is assigned when you apply for an FHA Loan.

  • When the appraisal is completed, it is recorded with FHA and is the only appraisal that can be used for that property for ____ days.

For example, if you enter a contract on a property and complete an FHA appraisal, and then cancel the contract for any reason (low appraisal, loan is denied, failed inspection, etc.), any future borrower that decides to buy the property that applies for an FHA Loan will have to use the original appraisal for a period of _____ days before it expires.