Are you a first time home buyer considering buying a home in 2023 but unsure about FHA vs Conventional? Which loan program is right for you? What are the fha loan requirements? What are the conventional loan requirements? What down payments and credit scores are needed for FHA and Conventional? In this episode, we compare the FHA Loan to the Conventional Loan to help you become The Educated HomeBuyer.
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[00:00:00] Jeb Smith, Huntington Beach Realtor: FHA versus conventional, which is right for you? There is a preconceived notion out there that based on your down payment that you have to go a certain direction when it comes to loan program, and in some cases that’s true. But what we’re gonna do in today’s video is we’re gonna debunk some of these myths.
We’re gonna talk about the differences between FHA versus conventional, help you make sense of it. Help you understand which loan program might be right for you. You know, Josh and I, we always talk about the numbers never lie. Compare both programs. If you’re buying a house and you wanna see what the loan programs look like, what your options look like, your mortgage professionals should be providing both of these to you.
But in today’s episode, what we’re gonna do is give you the differences between the two and let you make a decision or get an idea of which one might be right for you. So when you have that introductory call, rather with your mortgage professional, you can direct them, giving them an idea of the direction you want to go.
So Josh, let’s start by just talking about FHA, talking about conventional, what are in layman’s terms, if you will, and then we can start talking about down payment and credit requirements and all that good stuff.
[00:01:11] Josh Lewis, Certified Mortgage Consultant: Let’s throw an interesting piece of information out there. I get a lot of inquiries from people online and those folks have been on your YouTube channel, on Kyle’s YouTube channel, other places doing research.
And the conversation generally goes one of two ways. It’s either, “don’t say a word about an FHA loan. I do not want an FHA.” Or we have people on the other side of the coin and they, “I’ve watched all the videos I want an FHA loan.” And I say, “cool. It’s sort of the, the thing, I’m not a doctor, but I stayed at the holiday in express last night. Don’t try to play a loan officer.”
Like you do not know from watching videos which one is right for you? I would say at least 50% of the time the person is asking for the exact wrong thing. So some of this is counterintuitive. We’re gonna go through those details today. But in simple terms, like you said, Jeb, what are these two loans?
They are loans. One is directly guaranteed by the government, department of Housing and Urban Development runs the FHA Federal Housing Administration, and they insure these loans. So it’s a loan program that allows you to do a three and a half percent down minimum. And we’ll go through the rest of the requirements, but that’s the FHA program.
Conventional loan generally refers to loans that are not underwritten to government guidelines. So these are technically private entities, Fannie Mae and Freddie Mac. I chuckle. I chuckle. I chuckle when I say that. You chuckle when you say they’ve been in conservatorship for what, 112 years now, Jeb.
And when we say conservatorship, meaning basically owned by the government. So it’s not truly a government entity. They call ’em quasi-government entities, but as long as they’re in conservatorship just two different ways that the government can insure your home loan and make funding available for you.
To be clear, Jeb. Neither of these situations is the government making you the loan. They are setting the [00:03:00] framework and the guidelines for how these loans can be done and securitized, depending on FHA versus conventional. So don’t think that the government, in either case, is lending you the money, but the government is definitely setting the parameters for how these loans need to be done and what it’s going to look like for you at closing.
[00:03:18] Jeb Smith, Huntington Beach Realtor: Now I would go out on a limb, Josh, and say that nobody really cares who’s lending the money. They just wanna know, can I get the money? So now that you know who you know, backs the programs, let’s talk about what you actually want to know. Let’s start with down payment. Let’s talk about the idea of down payment requirements, because I think between this and credit scores, in my opinion, really separates the two types of programs, FHA versus conventional. So let’s start with the idea of down payment. What does FHA require? What does conventional require? What does that look like?
[00:03:49] Josh Lewis, Certified Mortgage Consultant: So, FHA is a minimum of three and a half percent down.
Most everyone’s familiar with that. More than 90% of FHA loans are done at the minimum down payment. If you look FHA puts out a housing trends report every month and it kind of breaks that down for you, shows you credit score, distribution, all that fun stuff. But the interesting one is, It is predominantly used by people who are doing a minimum down.
Now, conventional loans on the other side actually have a lower minimum down payment requirement. You can do a 3% down payment if you are a first time home buyer or if you meet Home Possible or HomeReady guidelines, which the primary requirement is that your income is at or below 80% of your area median income.
Depending on where you’re at, a lot of these loans get done and they’re a great option for first time home buyers. Or you’re in Southern California and if you make 80% of the area of median income, there’s nothing you can buy using HomeReady or Home Possible.
[00:04:44] Jeb Smith, Huntington Beach Realtor: No. That’s good to point out. You hear 3% and you think. “Great. I’d rather go with the conventional loan. It requires me less money down.” But again that doesn’t always mean that’s the best option for you because we’re gonna talk about some things here, mortgage insurance and some other things that add on to that, that make it a lot of times less attractive from most buyers point of view when they’re going through the process and they’re looking at the numbers and comparing the two options.
So we’ve talked a little bit about that. And that down payment, again, when you’re talking 3%, three and a half percent, we’re talking of the purchase price, right?
So when you’re talking a hundred thousand dollars, you’re talking three grand FHA $3,500. $200,000 purchase price. You’re talking six grand or $7,500. Now, I realize a lot of you guys are saying, Jeb, why are you doing the math? I’ll be honest I get this question. I’ll post videos. I’ll talk about three, three and a half percent, and people are like, what do, what does that actually equate to?
Really simple, guys, you take 3% and you multiply it by that purchase price. That’s essentially the amount that you have to put down. That’s just the down payment. There are other things like closing costs. We’ve talked about those in past episodes of The Educated Home Buyer, what you should expect to pay in closing costs.
That was in early in season one, so go back and check that out if you have [00:06:00] additional questions about closing costs. Here, we’re really talking about down payment when we’re talking about these two programs.
[00:06:06] Josh Lewis, Certified Mortgage Consultant: Before we move on, for those of you like us here in Southern California or other high cost areas around the country, high balance loans above that threshold of $726,200 3% down is no longer an option. Minimum down of 5%.
So if you’re in a high cost area, getting a large loan, it does jump up to 5% conventional. And for a lot of people, believe it or not, super well qualified, 800 credit score borrowers in Orange and LA counties oftentimes they’ll go FHA just cuz it is a percent and a half less in down payment on a fairly hefty purchase price.
[00:06:36] Jeb Smith, Huntington Beach Realtor: Nah, good stuff. So let’s move on and talk about credit requirements. Now, this is where the two programs somewhat separate from one another, but I wanna talk about the pros of the credit requirements but also the untold truth, when it comes to some of these credit requirements.
Some of the things that say FHA allows but may not be as easy to qualify for when it comes to actually getting those. So let’s maybe start with minimum requirements with regards to FHA, conventional, and then we can talk a little bit more about the details there.
[00:07:10] Josh Lewis, Certified Mortgage Consultant: So let’s just come out and say what FHA is, and then I’m gonna follow up with why this is the number one misunderstanding that buyers get out of self-education on the internet. It’s a five 80 minimum credit score for three and a half percent down payment. You can go lower than that, but below 580 it’s 10%. I get calls all the time. People say, “Hey, I’m good. I’ve got a 585. I wanna do FHA three and a half percent down.
There’s a couple problems with that. At 580, you are far less likely to get an automated approval. Doesn’t mean we can’t get you an approval, but without the automated approval, you’re going to be limited to lower debt to income ratios with a manual underwrite. So you’ve already therefore restricted yourself in terms of what you can qualify for.
The second piece of it, the interest rates are gonna be significantly higher. Lenders have more, if you look at the fallout. For loans below 620 credit score, more of them come into underwriting, fewer of them go out. So the labor to do these loans, most lenders will choose to pass. They set their own arbitrary number of 620-640 because these loans are so labor intensive and unlikely to close. Those that do them charge a premium.
So you’re gonna pay a higher interest rate, have a higher monthly payment be held to a lower debt to income and likely qualify for less. So none of those things are guaranteed, but in general, they are likely to be true. So what I tell clients is you really want to shoot for a 620 on FHA, 640 preferably with most lenders.
So FHA doesn’t distinguish between these. Lenders make these arbitrary distinctions and the majority of them fall in at 640, will get you good terms with an FHA 680 will get you the best terms. Are there some lenders out there that will pay a premium for a 740 credit score on an FHA? Yes, there are but 640 and 680 are the thresholds you want to get. 620 There are a few lenders that [00:09:00] dropped that bar and you’ll still be able to get much better terms if you can just clear that hurdle.
[00:09:04] Jeb Smith, Huntington Beach Realtor: Now, something important to note here, Josh kind of went over it but didn’t say. The terminology the same way I would say it.
These lenders have overlays on their programs, right? So 580 is the minimum guideline standard for FHA to put three point a half percent down. You might go into a bank, you might call a broker, and they say, Hey Jeb, Josh, you need a 640 to be able to get this loan. Now what Josh is talking about there is an overlay on the program.
That particular lender who’s doing the loan may not be able to go that low. Now that, like Josh mentioned a moment ago, that doesn’t necessarily mean you can’t get the loan with a lower credit score. Just means you need other options, right? And so when we talk about the idea of going into your local bank your local credit union, there’s very much a box that you fit into.
If you don’t fit into that box, essentially they can’t offer you loan approval. They essentially can’t do your loan. There are other places you can go. Brokers who have access to multiple lenders, multiple programs that can and oftentimes get your loan approved outside of these boxes.
So just understand if you get a no one place, it doesn’t necessarily mean you’re going to get a yes somewhere. But it also doesn’t necessarily mean you’re going to get a no somewhere else. So couple different options. Compare lenders, make sure you’re getting similar answers when it comes to the approval process.
Just in case you’re getting that quote unquote no to start. But Josh, let’s talk about conventional.
[00:10:30] Josh Lewis, Certified Mortgage Consultant: So conventional, the number is a hard and fast 620. I’ll throw a caveat out there that they changed this about a year or two ago. You can have a borrower on a file with a mid credited score lower than 620.
If we have multiple borrowers, they will average the mid score of the two, and that needs to be above 620. So you might have a 580 credit score. Your spouse has an 800 credit score, they’re gonna average that out, and you just got 110 point boost. And we have a 690 average. Unfortunately, they use your 580 for pricing. So you’re eligible based off of your credit score, but you’re gonna get the pricing of the lower median score.
So 620 is the rule for a single borrower to be eligible. Average the two borrowers, three borrowers, if we have more than one for eligibility, but pricing is gonna be bad. And then we have the same issues here, Jeb. Conventional loans, 99% of the time have to go through an automated underwriting system.
The lower you get in credit score, the higher you get in loan to value. So saying specifically here, we’re talking primarily to first time buyers, 3% down, 5% down. You’re the high loan to value. With a low credit score, you’re less likely to get approved or it will approve you at a lower amount. The automated underwriting systems are truly a black box.
We do not know the algorithms. We can sit there and play with your information and increase or decrease the loan amount by a thousand dollars and see. This is weird. Jeb will get approved at a 42% debt to income ratio, but not a 43.
You [00:12:00] know, we’ve talked about this on the show before. In general, conventional loans, you’re gonna get approval to 45%. The best borrowers will get approval to 50%, but we see weird stuff all the time where a marginal borrower is only gonna get approved to 37% or 39%. No real rhyme or reason for it, but we have to kind of play with the system to figure out where the max.
[00:12:21] Jeb Smith, Huntington Beach Realtor: No, And something also important to note there, Josh, is FHA can go as high as what debt to income ratio?
[00:12:27] Josh Lewis, Certified Mortgage Consultant: FHA 46.99. So call it 47% on your housing to income ratio, 57% on your total debt to income ratio. So when you add in your car, student loans, credit cards, all of that stuff. Definitely a big difference debt to income wise. That can be a pro or a con for first time buyers. A lot of times, they’re needing to stretch and they’re comfortable with a higher debt to income ratio. It just comes down to what your comfort level is. That 57% debt to income ratio, I look at ’em, the FHA mortgage insurance system is solvent, they’re not running outta money because of the foreclosures, but I look at it and I go that’s pretty aggressive. It’s a pretty aggressive number to go to.
[00:13:03] Jeb Smith, Huntington Beach Realtor: It is, but it also translates for many borrowers out there being able to go higher in purchase price. A little bit more lenient on the guidelines if you do have some debt. And Josh and I understand aren’t here pushing you to go to a higher debt to income ratio.
Oftentimes we have clients that have income that doesn’t necessarily report on their tax returns, so they make more income than might be reported in some form or fashion. And so they’re comfortable pushing that debt to income ratio a little bit higher because they know they have income coming from other places.
And in this case, FHA would allow you to push past that box, if you will, that we talked about earlier. Get approved for a little bit more and maybe you even have lower credit scores or whatever, being able to take advantage of lower rates and use the FHA loan. So just understand leniency wise, FHA is probably going to be the more lenient of the two.
But Josh, I mentioned interest rate right now. Let’s talk about rates. How do rates transfer between, you know, the differences between FHA versus conventional.
[00:14:05] Josh Lewis, Certified Mortgage Consultant: So this is funny, Jeb, people that listen here regularly know that you used to do loans.
And it’s interesting, luckily for you, you don’t have to do them anymore. So when I started in the nineties, FHA and VA loans had higher interest rates than conventional loans. And the reason being they go to higher debt to income ratios, they go to lower credit scores. There’s a greater risk of default. So you have to be compensated for that as an investor, right? You want a higher yield. You want a higher rate of interest on your money.
Well, somewhere along the line, post 2008, investors realized, at that time, before government conservatorship of Fannie Mae and Freddie Mac, Fannie and Freddie have an implied government, guarantee. FHA and VA have a literal backing of the US government.
So other than US treasuries, it’s the best debt that you can own. As a result, you’re gonna have a lower interest rate on an FHA or VA loan. It varies from day to day, from lender to lender. In general, you’ll have about a half percent lower [00:15:00] interest rate on an FHA loan than a conventional.
And probably an important part to talk about there, Jeb, is kind of going back to the credit requirements. Fannie and Freddy have an LLPA matrix that goes from the minimum 620 credit score all the way up to an 800 credit score at 20 point breaks, and the lower you go on credit score. The more you pay across the board.
So from that perspective, someone putting 3% down with a 780 credit score has to pay an extra 0.125 in fee. So $300,000 loan, it’s about 375 bucks. That same borrower with a 639 credit score or 621 credit score is paying 1.75 points extra. So you’re looking at what, almost $6,000 on that $300,000 loan.
So it is important to consider that because once you. Base rate is about a half percent better on an FHA versus conventional. When you go high ltv, low credit score, those conventional rates can get really high really quickly, and oftentimes for a low credit score borrower, you’ll see a difference of one and a half percent between a conventional loan and an FHA.
That’s why kind. Going back to the beginning of the show, Jeb, I get people that call and say, “don’t talk to me about an FHA loan. I don’t want an FHA loan. They’re terrible. I’ve read all about ’em and this, that, and the other”. Okay, well you have a 642 credit score. Do you want to pay a percent and a half higher? Do you want to pay a 2% mortgage insurance premium?
And they go, “no, I don’t wanna do that.” Okay, well then let’s talk about that FHA loan that you did not want to have. And again, like you just said, Jeb, this isn’t to push someone one way or the other, but to say the numbers don’t lie. Let’s pencil ’em out.
Here’s what you can do FHA and what the payment looks like. Here’s what you can do conventional, and here’s what the payments look like. Which do you prefer?
[00:16:34] Jeb Smith, Huntington Beach Realtor: And on top of that, I would say that the more common thing for people to wanna shy away from FHA is when it comes to mortgage insurance.
So let’s talk about FHA mortgage insurance versus conventional mortgage insurance. Let’s start with FHA, just some of the basics of mortgage insurance there. We can talk about some examples. And then we can talk about property requirements between FHA and conventional.
[00:16:54] Josh Lewis, Certified Mortgage Consultant: So two interesting quirks with FHA, regardless of how much money you put down, you put 80% down and finance 20% of the value. You still pay mortgage insurance. You’ll also For the most part have mortgage insurance for the life of the loan. And when I say for the most part is we talked earlier in the show, 90% plus of FHA loans are done with the minimum down payment.
Unless you put 10% down or more, you will have mortgage insurance for the life of the loan. So it will never go away the way the FHA guidelines currently are written. So an important note, and that’s one of the things that people freak out and say, “I don’t want FHA. I can never get rid of my mortgage insurance” before you run the numbers and quantify the difference.
So an interesting quirk also of FHA, everyone pays the same mortgage insurance rate. So Jeb has an 800 credit score. Josh has a 600 credit score. No worries. We both get to pay the same mortgage insurance rate. So minimum down standard loan balance, it’s 0.55%. If you want to put 5% or more down, it will drop to 0.50.
So people will often ask me, well, hey, what if I put 5% down? Does that get better? Yeah, you get 0.05% lower [00:18:00] mortgage insurance. So for the most part, doesn’t change your interest rate. Minuscule difference in the MI and an extra 1.5% doesn’t make a big difference in the loan amount. Most people say, I’ll stick with that minimum three and a half percent down.
The biggest difference here, Jeb, is it is a split premium mortgage insurance. Everyone knows, Hey, I pay it monthly. I’m putting minimum down. I’m gonna have it for the life of the loan. Shouldn’t say everyone, but most of the people we talk to are aware of that. What they’re unaware of or not clear on is there is an upfront mortgage insurance premium.
So an additional 1.75% is added on to your loan for everyone, regardless of down payment, regardless of down payment. So we talked about this being a minimum three and a half percent down. If you do that three and a half percent down, we take 96.5% of the purchase price, and then they’re gonna add 1.75% back on top of that.
So effectively half of your down payment goes away and goes back to the FHA. And what do they do with that? Again, it’s just like your monthly mortgage insurance premiums go to the FHA mortgage insurance fund. So does that upfront premium. And it sits there in their account until they wait for a down market when there are lots of defaults and foreclosures and they pay back the lenders for their losses for making these loans.
So, that is FHA mortgage insurance in a nutshell. And it’s really easy now when we kick over to convent. Things get wild because there’s lots of variations there and things that make the difference. So in general, your coverage requirements are gonna decrease with larger down payments. So the more you put down, the less insurance the lender needs, so that, that makes sense, right?
You know, if you put 3% down, The lender’s gonna be forced to buy 35% mortgage insurance coverage. So it’s in essence the same as you putting 38% down. As you put more money down, then less mortgage insurance is required and the premiums will get lower. So these rates are all over the place. They vary on all of the factors that we just talked about.
Higher credit score pays a lower mortgage insurance rate. Lower loan to value, so bigger down payment up to 20% down where it goes away, will pay a lower mortgage insurance premium. Two borrowers will pay lower premiums than a single borrower because the lenders or the mortgage insurance companies don’t want a single point of failure.
If Jeb and I buy together, And one of us passes away. One of us is still around to figure out how to make the payments. let’s not even say passes away, one of us gets incapacitated and can’t work. Well, at least there’s one person to make that payment. If you go the other way, one borrower gets incapacitated, can’t work, we pretty much have a big problem to the lender and the mortgage insurance company.
So all those,
[00:20:34] Jeb Smith, Huntington Beach Realtor: I also have a big problem if I’m incapacitated.
[00:20:37] Josh Lewis, Certified Mortgage Consultant: We both have problems. The lender and us have big problems.
[00:20:40] Jeb Smith, Huntington Beach Realtor: Yeah, there, there’s problems all around in that case. So not wishing those on anyone.
[00:20:44] Josh Lewis, Certified Mortgage Consultant: So another big contrast to FHA loans is this can be removed once certain conditions are met.
It’s a little bit complicated. Go back to episode 12, just a few episodes back. We go into great detail on mortgage insurance, far more than we’re going [00:21:00] to here. But Jeb, I thought it was useful. Without going fully down the rabbit hole, we talked about FHA being 0.55%. If you get above the loan amount of $625,500, that jumps up to 0.85%.
That’s the government and their infinite wisdom. Once upon a time, the high balance loan limit or the standard balance loan limit was $625,500. So they said anything above that, you have to pay more mortgage insurance. Well, every year that gets indexed and goes up. And they didn’t think, Hey, let’s set it at the high balance or the standard balance limit.
They set it at $625,500. So now you can get a loan up to $1,089,300, but we still sit here. Anyone over $625,500 pays a higher mortgage insurance rate. So .55, .85 and you’ll get 0.05 lower if you put 5% or more down. Now on the conventional side, I just wanted to throw two examples here and a couple of different down payments.
So if we have a single family residence with two borrowers, both have a 740 credit score and it’s a 40% or lower debt to income ratio, if they put 3% down, it’s 0.52%. So very similar to FHA. But the benefit Jeb obviously goes to the conventional loan cuz you don’t pay that 1.75% upfront. So you end up with a 97% loan versus the borrower who put three and a 5% down, but ends up with a 98 and change percent loan.
So if we take that up to 5% down, it drops to 0.35%. Even more in conventionals favor. If we go up to 10%, it drops all the way down to 0.23%, and you’re probably sitting here going, Wolf, if I got a 740 credit score and a co-borrower that has a 740 credit score, I gotta go conventional. Well, remember, the interest rate is gonna be at least a half percent higher on this conventional loan, so we still have to run the numbers. Look at the pros and cons and pencil it out.
This is the one that I wanted to show everyone. Jeb, let’s take that credit score down to a 660. Not a horrible credit score. Let’s take away the co-borrower. We have a single borrower and let’s bump that debt to income ratio up to 46%.
With 3% down, assuming you get approved and the mortgage insurance company will approve this. They only want 3.16% per year for their mortgage insurance. So six times what the FHA mortgage insurance is
[00:23:10] Jeb Smith, Huntington Beach Realtor: And six times the amount of example one. Almost seven times the amount of example one.
[00:23:16] Josh Lewis, Certified Mortgage Consultant: Yeah. So think about this, Jeb. In a year I probably help 10 borrowers that, that match that criteria. Sub 680 credit score 46 ish DTI and a single borrower. We do them FHA because these numbers are just crazy. So if you put 5% down, it drops down to 2.21%. Still crazy. You
[00:23:35] Josh Lewis, Certified Mortgage Consultant: put 10% down, one and a half percent. Still crazy. So if this person calls me and they’re adamantly anti FHA, Once we run the numbers, they slowly or rather quickly, actually come to the conclusion that, hey, maybe FHA is not so bad.
If you’re listening to this, I would say this is a little bit off topic, but if you’re thinking about buying a house, maybe you’re not a hundred percent ready. It’s in the cards, if you will. You’re, in [00:24:00] my opinion, better off focusing on your credit score, improving your credit score than you are focusing on getting a large down payment.
I mean, granted, having both is nice. But just look, credit score alone improves your interest rate so much more than a couple more percent in the down payment. So if you’re out there thinking about what to be working on, work on paying down your debt if you can, that’ll help your debt to income ratio, but try to improve that score cuz it’s gonna make a huge difference at the end of the day when you go to do anything.
I mean, car loan, housing loan, any type of financing. The better your credit, the better the terms. But Josh, let’s move along here. We talked earlier about moving to property requirements, which we’re going to do. But let’s talk a little bit about loan limits. So there are some restrictions when it comes to FHA and conventional on how much money they will actually lend you.
So what are the difference in the two?
Start with conventional as a baseline. Conventional loans everywhere in the country, you can get to at least $726,200. That’s the base minimum. If you’re in a high cost area, you can get as high as 150% of that. So $1,089,300. It’s 150% of the minimum.
What I to point out on that is that is not guaranteed. The best example for us in Southern California is San Diego county has high balance loans, but they don’t go all the way up to $1,089,300. I think it’s just under a million dollars is their limit. So it can be anywhere from the standard balance limit up to 150% of that for conventional loans. But at least it’s easy to say everywhere in the 50 United States, a conventional loan. I can go up to $726,200.
[00:25:39] Jeb Smith, Huntington Beach Realtor: Hold on. There’s 50 states. I thought they were only 48.
[00:25:42] Josh Lewis, Certified Mortgage Consultant: Five Zero. We got Alaska and Hawaii. We got ’em 70 or 80 years ago.
[00:25:47] Jeb Smith, Huntington Beach Realtor: I actually heard somebody say that the other day. I was like, bro, Really we’re still thinking there’s only 48 states anyway, moving along.
[00:25:54] Josh Lewis, Certified Mortgage Consultant: So throw it over to FHA And they complicate this a little bit because they have a floor amount. They set the floor, so meaning the lowest that the limit could ever be anywhere in all 50 of Jeb’s United States is 65% of the standard balance limit. So it comes up to $472,030. That’s the lowest that the FHA limit can be.
For many parts of the country, it matches the conforming loan limits, but you have to look up your county and see where it falls in. We know it’s gonna be a minimum of $472,030. So an example, fresno County here in California, they can only go up to $472,030 on FHA. They can only go up to $726,200 on a conventional loan. No high balance, nothing above the minimum county limit for FHA.
Now, when we roll that over to conventional, for us in Orange County, LA County, we’re the opposite end of the spectrum. You can go as high as possible, so FHA and conventional can both go to the same maximum of 150% of the standard balance, or $1,089,300.
[00:26:55] Jeb Smith, Huntington Beach Realtor: And it’s important to note the why, right?
So, it has to do with affordability in that [00:27:00] area, right? So the median income levels in those markets are lower therefore the amounts that they’re willing to lend in theory should be lower. So they’re not discriminating, just saying, “Hey, Fresno, you don’t deserve it.” It has to do with affordability in that market with regards to incomes and all of that Good stuff.
[00:27:16] Josh Lewis, Certified Mortgage Consultant: Well, Jeb let’s talk about that just super quick. What they do is, it is set at 115% of the FHFA’s median home price. So where you really get into problems is counties like Riverside County that in general have a lower countywide median home price, but pockets like Corona that have much, much higher prices.
So the folks in Corona are stuck with a low limit cuz it’s 115% of the county median, despite the fact that they have prices very similar, if not as high or higher than Orange and LA counties. So no one gets to make a decision every January it’s written into the laws that we run these numbers and we run this percentage on it and it tells us what the limit’s gonna be.
[00:27:59] Jeb Smith, Huntington Beach Realtor: And with that said, As the median home price rises across the United States, that number typically goes up every year. But something also important to note, if the median home price comes down, prices drop, they don’t typically lower the number. You never see the number go the other direction. It more or less, will stay the same for that period of time.
Kinda like when we used to see the $417,000, Josh it stayed there for a number of years when we were coming out of the housing crash debacle of ’08. And then as prices started to increase, we started to see those loan limits increase as well. So we’ve talked about conventional, let’s talk about FHA.
What’s the difference?
[00:28:32] Josh Lewis, Certified Mortgage Consultant: Difference in what part?
[00:28:33] Jeb Smith, Huntington Beach Realtor: Did we go over the loan limit in FHA?
[00:28:35] Josh Lewis, Certified Mortgage Consultant: We started there, my friend. That’s awesome. No, I thought we started with conventional. You gave the basics of conventional. I didn’t think we touched on all the details of FHA, but
the floor limit of $472,030. So, really most counties in the United States are somewhere between. They’re either at that floor or slightly above it. So you need to go to the chart, look it up. Just Google it. It will tell you your county’s limit .
[00:28:58] Jeb Smith, Huntington Beach Realtor: Now. But FHA can go higher, just like conventional. As we mentioned a moment ago I mean, did I black out during this conversation when you went all over this?
[00:29:06] Josh Lewis, Certified Mortgage Consultant: You were trying to name all 50 states that you had. I was going over my head. I was like Puerto B, Alabama, Puerto Rico.
[00:29:14] Jeb Smith, Huntington Beach Realtor: Okay. Well hey guys, I guess I was out of the loop there. So let’s talk about some differences in them when they come to, you know, we get people talking all the time, Josh, about I don’t want to do FHA because I’ve heard that they are stricter with the appraisal.
They’re going to point out things in the property. It’s just not gonna work when it comes to buying that home using an FHA loan. So let’s talk about some of those requirement wise, when it comes to conventional and FHA and how they’re alike and how they’re different.
[00:29:42] Josh Lewis, Certified Mortgage Consultant: So, an FHA appraiser is required by the FHA to do a visual and sort of minimal property inspection. So it’s not the same, jeb is still gonna tell you we need to get a home inspection that is not a home inspector, but they have to stick their head up in the attic. They [00:30:00] have to look under the house.
Anything they see that is obviously visually wrong, impaired, missing, problematic from a health and safety standpoint, they will call that out. So an FHA loan is more likely to have conditions on the appraisal, and what that means is there’s two things that we look for when we get an appraisal in Jeb.
It’s what is the value? Did we get the value that is the agreed upon contract price? And then is it as is meaning they’re cool with the way it is, or are there conditions that we need to fix with the property? I have one right now. It’s a one that we have together, or similar to one that we have together.
The listing agent didn’t make sure that the water heater was strapped. Appraiser goes out and now we have a condition on the appraisal to double strap the water heater, which is required here in earthquake country. So things of that sort. The big one with FHA, if you have obvious peeling chipping paint, it will be called out and you will have to repair it.
But for the most part they’re similar. I mean, a conventional appraiser, if they go out and there’s an empty pool in the backyard that has a foot of black water sitting in the bottom of it, they have to call that out as a health and safety issue. They’re still going to have an issue with it.
It’s just they aren’t required to look quite as closely in the issues of the property. So you are more likely to have a conventional go through. But there’s not, in practical terms, a huge difference between the two.
[00:31:16] Jeb Smith, Huntington Beach Realtor: No. And something also important to note here is that when you have properties that like need to be completely rehabbed, like for example, I have a client that made an offer on a property recently.
I wasn’t there when they saw it during the open house. They came back and wanted to write an offer and we knew there were some things that needed to be worked on. Well, the bathroom and one of the bathrooms was completely. Down to the studs in the bathroom. They were doing a con, a conventional loan, putting a decent down payment.
Well, basically the agent came back and said, listen, we’ve talked to several lenders. Nobody is going to finance this piece of property because we’re down to the studs here. So when you’ve got those types of issues, it’s gonna be called out every single time. But I would say in my career doing these, Rarely do you have issues come back in properties FHA and or conventional that you wouldn’t have guessed they would’ve been issues to start.
It’s things that you more or less in my eye, you already knew were going to be a potential hiccup within the property. And like Josh said, you know, I’ve seen properties where they didn’t have heat, the furnace was missing from the property. That’s a health and safety issue when you don’t have heat in a property and temperatures get lower.
So, when you think there could be a problem, chances are, you’re probably reading it right. And it’s not anything, in my opinion, usually above and beyond that. But, it doesn’t kill the deal necessarily, but it does require the seller to go out and repair, fix those issues, but it also costs you more money because now the appraiser has to go out again, reinspect those things to make sure they are there and they’re going to charge you to do that.
So it’s better to make sure this stuff’s done upfront so that, appraisers aren’t having to go out, and redo things and just make sure you’re not wasting your time, your money or even, getting into a situation where you know you’re not gonna be able to close on a property for some [00:33:00] of these reasons.
[00:33:00] Josh Lewis, Certified Mortgage Consultant: And Jeb, not to pat you on the back, but good agents will protect you from this. I said we have the same issue on a listing that you are representing the buyers and you came back after the home inspection, said do not send an appraiser out there because they have to get this done.
On the other transaction, neither agent bothered to look at this and my client is paying $165 reinspection fee after they repaired it. So what? It probably cost ’em $150-200 to have the handyman strap it and we’re paying a $165 reinspection fee. We just burned $365 for no reason that they should have had that taken care of ahead of time.
So, like you said, a good realtor should know, Hey, my listing is going to have an issue going FHA, so my seller doesn’t want pay for this peeling paint. I’m telling you it’s there. You are going to have to repair it. If you want us to accept an FHA.
[00:33:46] Jeb Smith, Huntington Beach Realtor: And one thing I don’t see in our notes here, Josh, just want to clarify conventional financing here in the state of California, termite inspections are really common. Coastal, we’re by the water termites love damp areas.
They love wood. Houses have wood. So you see a lot of termites in areas that we’re in. Conventional loans don’t necessarily require a termite clearance on a property. Is that different with FHA.
[00:34:09] Josh Lewis, Certified Mortgage Consultant: Jeb, you’re showing that it’s been 10 plus years since you’ve done loans. Cuz back in the day, FHA used to require it, right?
When you were doing loans, it was required with FHA. They don’t require it. But either one of them, let’s say you have a horrifically termite infested house, conventional or FHA. That appraiser’s gonna go, “Hey, the eaves of the entire house are dropping dust on my head from the termites as I go around.” It’s going to be noted and the appraiser’s gonna say, or the underwriter is going to say, “We seem to see that there’s a termite, a potential termite infestation. I want a termite report.”
And then when the termite report comes back saying, yeah, there’s $4,000 of repairs, they’re gonna require those repairs. The only type of loan today that still requires a termite report and clearance is VA, and that varies by the portion of the country. They have a funny little U map, so if you’re in the middle top of the United States where it’s very cold you don’t have to have it. But most of the US you do on a VA loan.
[00:35:01] Jeb Smith, Huntington Beach Realtor: And one thing I wanna mention here while we’re talking about FHA and conventional, I don’t wanna go into a lot of detail because honestly we could talk another 20, 30 minutes about this topic. In competitive markets, FHA loans are going to be a little bit harder to get accepted in my opinion just based off experience than that of a conventional loan because of some of the things that we mentioned here.
Because they allow a lower down payment. Because they allow a lower credit score. Because there could be the possibility that an appraiser calls out some of these things on a property. And you might be asking, “why does it matter Jeb? I’ve been pre-approved. The lender says I’m good to go. Why do these things matter?”
Because it’s perception. Agents that don’t understand FHA loans. Sellers that are getting bad information from their agent with regards to FHA often will frown on FHA when comparing it to a conventional loan. And oftentimes in competitive markets, like the ones we’ve seen over the [00:36:00] last couple of years, when there’s multiple offers, 5, 10, 20 offers and there’s an FHA in there, the FHA many times is going to get pushed to the bottom of the pile because of some of these things.
So, if you’re in a less competitive market, a buyer’s market, if you will, nothing selling. Chances are there’s no real issues with FHA, but it is something important to note. Doesn’t mean you shouldn’t do it, doesn’t mean you shouldn’t try. Just make sure you’re working with an agent that understands FHA loans so that they can convey that to the other side.
Have a lender that can have that conversation with the agents also. Just to make sure that you’re all on the same page because again it’s perception. It’s not reality, but it can affect in some cases your ability to actually be able to get an offer accepted.
[00:36:44] Josh Lewis, Certified Mortgage Consultant: Jeb listening to you talk, listening to the things that I said. My big takeaway from this, I mean, sometimes we do an episode and I’m talking, you’re talking, we know what we’re gonna talk about, but hearing us go through it, bring some about some different thinking.
And it just reminds me that there’s not a right answer. It’s nuanced. Your realtor. Is going have some input. The property you’re buying is gonna have some input. And some borrowers have to go one way or the other. And generally that one way is FHA. But oftentimes we’ve got options and there’s pros and cons. It’s a balance. There’s not one that, hey, this is the right one.
So, the only thing I wanna leave everyone with today is there’s not a right answer. Don’t have preconceived notions. Make sure you’re working with someone who’s an expert on both sides of the equation. FHA and conventional loans knows how to work with mortgage insurance, as Jeb said, knows how to help you maximize your credit score.
Oftentimes paying off some debt and going with the lower down payment will get you better terms and much better cash flow. So, no right answer. Do your homework. Work with pros. Arrive at the best decision for you and your situation and the property that you’re looking to buy.
[00:37:47] Jeb Smith, Huntington Beach Realtor: There’s nothing of value that I can add on top of that.
So I’ll end with thanking you guys for continuing to listen, the continued support. If you find any value at all, leave us a review. If you’re seeing us on YouTube, give us that thumbs up. But until next time, Adios!
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