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First Time H…, Home Owner in Redlands, CA

First time home buyers: what is best FHA or conventional loan?

Asked by First Time Home Owner, Redlands, CA Sat Jan 21, 2012

We are wanting our monthly payments to be lower than what we are paying for rent. Yet, lender just told us that we cannot do conventional loan because of my husband's thin credit. He has no debt, has only had one credit in the last 20 years. We want to put 20% but I feel we are being penalized for not having enough debt as well as because of leaves that I have taken from work (a job that I have been at for 11 years) due to pregnancies and our child being very ill.

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First Time Home Owner’s answer
Hello everyone, just a quick note to up date everyone. We got the home and we are enjoying being first time home buyers. Could not have done it without the amazing support you gave us and a BIG SPECIAL thanks to our lender (Gregorio Denny) whom we met through here for his AMAZING ROLE in helping us close.
2 votes Thank Flag Link Sun May 13, 2012
BEST ANSWER
"Everyone is entitled to their opion I respect that. I just don't agree. "

Gary,
You are entitled to your opinion, you are just not entitled to give terrible mortgage advice to a borrower especially since you don't have the license to do so.

" If interest rates go up the buyer is in a very good position if they decide to sell. Why not use someone elses money at less than 4% interest and then make it availble to your buyer at a later date?"

So you expect the borrower to over pay every month so in the event they sell, their potential borrower can get a great rate? And that is your advice? You apparently are unaware that conforming mortgage rates are low as well.

Let's do some math.

200K Mortgage, 20% down conventional conforming
Let's just use a 3.75% rate for both FHA and Conventional as they are both available now.

FHA 3.5% down
Loan amount including UFMIP = $194,930
Principal and interest payment = 902.75
MI = 183.41
_______________________
Payment not including Taxes and insurance = 1086.16


Conforming 20% down
Loan amount = $160,000
Principal and interest payment $740.98
____________________________
Payment not including taxes and insurance = 740.98


After 5 years:
Conforming: The borrower will have paid $84,458.80 ($44,458.80 in payments / $40,000 in down payment). They will have a payoff of $144,413.40 on their home after 5 years of scheduled payments.

FHA: The borrower will have paid $71,738.32 ($54,165.00 in payments / $10,573.32 in MI / $7000 in down payment). They will have a payoff of $175,940.65 on their home after 5 years of scheduled payments.

$84,458.80
- $71,738.22
_______________
$12,720.58 More invested in conforming loan after 5 years.

$175,940.65
-$144,413.40
______________
$31,527.25 more equity after 5 years when they sell

In your expert opinion, please tell me where they can invest $12,720.58 over 5 years and get a 248% return on their investment?

Please tell me why you are suggesting they pay $10,573.32 in mortgage insurance over the next 5 years.
In the above example, if they do not sell, they will continue to make mortgage payments for a total of 9 years of scheduled payments and the numbers get even more staggeringly in favor of conforming.
2 votes Thank Flag Link Sat Jan 21, 2012
Great answer, this is what buyers need from the professionals, plenty of details.
Flag Tue May 22, 2012
Conventional is always better from a number of standpoints, but if FHA is all you can do, it's all you can do:) Give it your best shot with an FHA loan. Be aware that if you are looking for a condo or townhome that you complex must be approved by the FHA.
2 votes Thank Flag Link Sun May 13, 2012
You must provide 2 months of your most recent bank statements no matter who you use. You would only have a problem switching lenders if you stayed with an FHA loan, and they have already gotten your case number, whch I know they did if your appraisal was done already.
It is not unusual for you to have to explain the PO Box issue. If it s not common for your area, they will question it. The underwriters can ask you for whatever they feel is necessary because they are on the hook for approving your loan. Getting a loan now is very stressful, and considering the fact that you have young children, including one that had been ill, this may not have been the best time for you to so this.
2 votes Thank Flag Link Sun Jan 22, 2012
Worried,
I want to echo Robin and repeat my earlier advice, call Gregorio. I'm sure your lender is "nice" and I know lots of nice people who I don't do business with. You need someone who will explain and fight for your position.
Your joint credit may make up for your husband’s thin credit and your employment gaps have reasonable explanations. I would also just consider trying to get your loan approved in your husband’s name only as he has the consistent income and higher score. Non-traditional credit like cell phones, utilities may be used to fill out the credit profile in some cases.
If you talk to Gregorio and want to stay with your current lender, you are free to do so, but getting another opinion based on a fuller disclosure than you should do here makes sense.
2 votes Thank Flag Link Sat Jan 21, 2012
Worried, I would give Gregorio a call and have him analze this for you. If you are paid hourly, it mght be more difficult to use your full income, but wether you go FHA or conventional is not going to make a difference with that. Your credit score will however.
What I am sure Gregorio will do for you is compare what the rate will be for you on a conventional loan, as you are going to pay a higher rate due to the adjustment for yor score at 80% financing, and then see what it wyld be if you took the same loan amunt FHA, where you don't have an adjustment for your score, but do pay the mortgage insurance, which is the 1% upfront and 1.10 with sn LTV of 95 or less.
2 votes Thank Flag Link Sat Jan 21, 2012
No, if you are willing to pay for another appraisal, you can change lenders and get a conventional loan. Get a second opinion and see what your rate and payments would be on a conventional loan. The reason we recmmend Gregorio s because we can see fom his answers that he knows what he is talkng about, so I would trust him t give you an honest opinion about whether it can be done. You will have yo produce all new documents though. if you made copies of what you gave the other lender, you can use the same ones.
1 vote Thank Flag Link Sun Jan 22, 2012
Worried,

I was addressing someone who posted comments and apparently did not have the conviction to stand behind them. It's probably for the best that he deleted them because they were giving you terrible advice.

You will have to ask your lender why they say you don't qualify. I cannot answer as to why they won't give you a conventional loan, only that I believe you could get one. Are you working with a bank or a broker?
1 vote Thank Flag Link Sat Jan 21, 2012
A couple things come to mind:

If you are trying to keep our payment as low as you can, I consider that you look into a larger down payment or you could look to use some of your money to buy down the rate.

When you meet with a mortgage broker, have them show you a clear comparison of the different loan programs that you have to pick from!

Thanks,
Brooke Hengst
REALTOR, CDPE, The Elite Team
Your Castle Real Estate
p: (720) 988-5952
bhengst1@gmail.com
http://www.brookehengst.com
Web Reference: http://brookehengst.com
1 vote Thank Flag Link Sat Jan 21, 2012
Gary,

With all due respect, telling a buyer that has 20% down and qualifications for a conventional mortgage, to opt for an FHA mortgage, is borderline predatory. There is absolutely no justification for it what-so-ever. Not only will they pay the monthly mortgage insurance at a factor of 1.15, they will pay an up front fee of 1%, be forced to keep the mortgage insurance for at minimum 5 years and spend tens of thousands more over the life of the loan.

Your advice is terrible.
1 vote Thank Flag Link Sat Jan 21, 2012
Worried,
I really agree with Gregorio, get another opinion. There are so many factors to consider and having thin credit may affect some of your options, but there may be other choices than FHA. Start by calling Gregorio and discuss this in greater depth. He will let you know the options he can see and you can decide from there. Best of luck and don't worry, this is an exciting time. Take some time to get informed and have fun.
1 vote Thank Flag Link Sat Jan 21, 2012
If you have 20% down, you don't want to use an FHA mortgage because you will still be required to pay mortgage insurance. If your husband is 'thin" on credit and it's not the score that's an issue, a good loan officer should be able to handle this situation for you. You should definitely get a second opinion before proceeding with FHA. Contact me and I'd be happy to take a look at your options. What you have described does not sound as if it should be a problem.
Web Reference: http://TripointMortgage.Net
1 vote Thank Flag Link Sat Jan 21, 2012
Dear Worried,

You are asking several questions here.

Having no or little credit is not a reason to get turned down. Do you have all three credit scores?

Yes a conventional loan would be better for you.

If it is the same job, they should not count that against you, it might even be illegal.

I would have to look at the whole situation, but would almost bet lunch that I could do this loan.
1 vote Thank Flag Link Sat Jan 21, 2012
Sounds like your credit score is low, or you don't have one. To qualify for a mortgage, unfortunately you need to have a credit score, and yes, have debt.....the trick is to get a credit card, use it and pay it off for several months to establish the ability to pay, and raise your credit score (I would suggest speaking with a mortgage loan officer on the quickest way in which to establish/raise your credit score).

The second part of your question is whether conventional or an FHA loan is better...a reason for the FHA popularity is that it only requires a 3.5% downpayment. If you are able to put 20% down, you will avoid the mortgage insurance which otherwise would be required (about .0115% of the purchase price annually), which is quite a savings to you!

Hope this helps!
1 vote Thank Flag Link Sat Jan 21, 2012
A good mortgage broker or loan officer should be able to give you the details. Check out http://www.whywaitbuytoday.com for details.
0 votes Thank Flag Link Sun Aug 11, 2013
Very frustrating and yes, you are being penalized for not having a credit history and not for not having debt. How do you build your credit history? It is certainly not by going out there and start charging everything you buy. Lenders and financial institution want to be able to pull your credit and see how disciplined you have been in repaying any loans.
Start with applying for a credit card and use it for your standard monthly expenses such as food, gas, bus pass, and so on. Always pay your credit card bill on time and in full. You will be able to do this only if you use the credit card for purchases that you do during the month with cash. This money must be sitting in your checking account so that you can pay off your credit card bill in full every month.
Do not ever use the credit card to purchase items you cannot afford or items you do not need nor have money in the bank for to pay off quickly. If you have to use it for emergencies establish a lower interest loan to use for such occasions that way you avoid paying the credit card companies the high interest they charge you.
Additionally, finance your car, even if you have the money to pay it in full. You can make the first few payments and then you can pay it in full if you wish. This is the way you start building your credit along with a great credit score. Paying everything you buy with cash does not give you any credit history.
0 votes Thank Flag Link Wed Mar 20, 2013
Congratulations on your purchase! Hope you have many happy years there!
0 votes Thank Flag Link Wed Sep 19, 2012
Hello First Time Home Owner,

Try another lender!

Also, if you can qualify without your husband try getting the loan in your name only, but both of you can still be on title.

If you go conventional your closing cost will be less because you will not have to pay the "up front" insurance you have to pay with FHA, and if you put 20% down you will avoid the PMI so your monthly payment will be lower.

Best of luck to you!

Kawain Payne, Realtor
0 votes Thank Flag Link Sat Jun 23, 2012
Sanya2000

A few things to consider.

Even if you put 22% down, you will still pay mortgage insurance on a 30 year FHA loan as well as the 1.75% up front premium. The only time you don't pay the mortgage insurance on an FHA loan is if you go with a 15 year and put 22% or more down but you still have to pay the 1.75% premium.

As for June 11, that has nothing to do with a purchase. That is the date when those with current FHA mortgages are grandfathered into their MIP and can do a streamline refinance without being subject to the current premiums. This does not affect purchases or FHA case number prior to June 11, 2012.

You should have someone take a look at the employment history. You may still be able to get a conventional loan without the 2 year history. Fannie Mae guidelines state:

"A minimum history of two years of employment income is recommended.
However, income that has been received for a shorter period of time may be
considered as acceptable income, as long as the borrower’s employment profile
demonstrates that there are positive factors to reasonably offset the shorter income
history."

Feel free to contact me if you would like a second opinion.
0 votes Thank Flag Link Mon May 28, 2012
What if they put 22% down and go with FHA? As far as I understand there is no mortgage insurance on LTV 78% for FHA.
The reason they can't go conventional is because they didn't have steady employment last 2 years???
Can someone explain to me about FHA mortgage insurance; if we pay upfront MIP cash with the closing cost do we still have a monthly payments and how much if we close after June 11th?
0 votes Thank Flag Link Mon May 28, 2012
FOR SURE TALK TO GREGORIO DENNY. We used him after coming hear and asking MANY different questions. He saved us from a lot of trouble, and was ALWAYS looking out for us.
Flag Mon May 28, 2012
You should try a few lenders to get qualified for conventional, there should be a way to do it. You do not want to go FHA with 20% down. FHA carries way too much mortgage insurance. Give me a call if you would like to discuss.

Rob,
858-922-7899
0 votes Thank Flag Link Sun May 13, 2012
Hello,

Just to update you guys, we have had our eyes opened and without giving all of you the MANY details. We are glad that we got a second opinion. Thanks to all of you and to Gregorio. Still unsure about where this leads us, but it sure feels good not going into something blind.

Thanks again,
Worried
0 votes Thank Flag Link Wed Jan 25, 2012
Robin,

Thanks for making it clear why they would ask for those items. So now that the appraisal has been done, does that mean we are stuck with the FHA loan?
0 votes Thank Flag Link Sun Jan 22, 2012
Hello again,

So what I am hearing all of you say is that I should obtain a second opinion. Are we allowed to do that at this point? I mean I don't know how things work, but I thought I couldn't change lenders at this point. We have paid and done the appraisal (still don't know the results of that). Wouldn't talking to another lender get us in trouble with our current lender? Plus would we need to start the process all over, I have gathered up so many documents for our current lender, I can't see myself putting that much effort into another loan officer. With that said I of course don't want us to get into a loan that is not in our best interest to do. Therefore if you are advising we seek a second opinion how do we go about doing that?

Another question: Is asking for bank statements with all of our spending for the last 2 months a normal request? I feel very uncomfortable giving all of that information to someone. They have also asked for a letter explaining why we have a P.O. box.

I feel that our lender is afraid of giving us the loan... he continues to tell us that he needs to check with the underwriter...that the underwriter needs this and that etc.

Why those this have to be so hard, I am already so emotionally drained with other things that have come up.

Very thankful to all of you for giving us the opportunity to bounce ideas off of you.
0 votes Thank Flag Link Sat Jan 21, 2012
Hello everyone sorry that I have not been able to answer your questions, I have been away from the computer until now. I'll see if I can answer everyone's questions.

@ Mike our scores are: Mine is 663, my husband is 793. My husband has had one credit card for 21 years has used it and payed it off. One of the reasons we wanted to go conventional was because of the insurance piece that we would have to pay on the loan.

@ Richard, we also feel conventional would be best for us, but our lender said we would not qualify. It has been the same job for the past 11 years. I have been off work because our daughter was very ill and I needed to stay home with her. I return to work on February 17, 2012 have been off since October 24, 2011.

@Gregory I am not sure why you are addressing Gary (I don't see a Gary posting any messages on here). Maybe he posted messages and deleted them. Anyhow, we want to go conventional bottom line and we like our lender very much, but I am not understanding why we don't qualify for a conventional loan.

He says it's because of my husbands thin credit, the "gaps" in my job (which are due to medical leaves), the gaps in my husband's job history.
0 votes Thank Flag Link Sat Jan 21, 2012
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