Conventional vs FHA Mortgages | Loan Pronto
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by Lindsey Peterson / May 11, 2018

Conventional vs. FHA Mortgages – Should a seller accept an offer from a Conventional borrower over an FHA borrower?

Say What?!

We had a borrower here in Charlotte call us yesterday to tell us that they missed out on an awesome property because the seller chose another offer.  Our client’s offer was nearly $10,000 higher than the other! So, why did they accept the lower offer? Our buyer was getting an FHA loan and the other buyer was getting a Conventional loan. 

A common (and very incorrect) stigma is that FHA loans are only for borrowers with very poor credit and, therefore, they are unlikely to get approved. This wasn’t the first time we have heard of a seller in our Charlotte or Raleigh markets scoffing at an offer because the buyer was getting and FHA loan. 

Let’s look at some attributes of each loan to understand the differences between Conventional and FHA.

Conventional Loan

  • Geared towards borrowers with higher credit scores
  • Allows you to borrow up to $454,100 in most areas with as high as $625,000 in certain high-cost areas
  • Allows as little as 3% down payment
  • Has a maximum debt to income ratio of 49.99%
  • With 20% down, you do not need mortgage insurance. Borrowers with excellent credit can get loans without mortgage insurance with as little as 3% down
  • Mortgage Insurance varies with different credit scores
  • Mortgage insurance comes off once you get to 78% LTV
  • More stringent underwriting guidelines
  • Requires a conventional, 1004 appraisal

FHA Loan

  • Can lend to borrowers with a credit score is low as 580
  • Most markets are capped out at around $294,515 but can much be higher in certain, high-cost areas
  • Requires 3.5% down payment
  • All FHA loans have mortgage insurance regardless of the down payment
  • Requires an upfront fee of 1.75% on all loans
  • Allows up to 55% DTI
  • More lenient underwriting guidelines
  • All borrowers have the same mortgage insurance rates
  • Requires a specific FHA appraisal that is more stringent and has the additional duty of pointing out safety hazards and things that need to be fixed prior to closing. 
  • Less Elapsed time between major credit issues (BK, Foreclosure)
  • Ability to take advantage of an FHA Streamline refinance after the original purchase
  • Lower interest rates compared to Conventional loans with borrower with credit score <680
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This or That?

In the past, there was a clearer difference between an FHA and a Conventional loan. For instance, FHA loans used to require significantly more paperwork than Conventional loans, but nowadays there is very little difference.  FHA loans used to be geared only towards first time homebuyers, and that is no longer the case. As access to credit has decreased, the lines between the two have blurred. We see many buyers purchasing homes in Charlotte, North Carolina and Raleigh, North Carolina that have excellent credit but find the benefits of the FHA outweigh those of a Conventional. 

Should a seller consider an offer from a borrower obtaining a Conventional loan over an FHA Loan?  The short answer is, no. FHA loans get approved at the same rate as Conventional loans.  In fact, you could make the case that they offer more flexibility.  For example, if a debt shows up on a borrower’s credit after you pull it, FHA’s ability to go to 55% might save the deal.

There are two situations when a seller should choose a Conventional offer over an FHA offer. First, if the property has safety issues or things that need to be fixed, a Conventional appraisal will be less likely to point out those issues while an FHA appraiser will require those to be fixed prior to closing. Next, if it is a condo that is not already approved by FHA, you would absolutely want to stick with a Conventional loan.

For all intents and purposes, a borrower with an FHA loan is just as likely to get approved as one getting a conventional loan. If you are selling your home, go with the best offer, and pay more attention to the borrower’s pre-approval letter than the type of loan they are getting.  

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