Home Buying in Chicago>Question Details

AML, Home Buyer in Chicago, IL

FHA (higher offer) VS Conventional (lower offer) Which is stronger?

Asked by AML, Chicago, IL Mon Dec 9, 2013

Hi there, based on my down payment amount often times I have to choose whether I offer a higher offer amount and go the route of FHA which only requires 3.5% down or if i should go the route of conventional at a lower offer amount (to ensure I can afford the 20% down) I currently have 20K available and qualify for 175K purchase price at 3.5% down. There are plenty of houses where I have offered significantly over asking in the past using FHA and wonder if a conventional loan looks stronger even if the offer amount is less (still at least asking) What do you guys think? Is the total amount offered really all that is looked at? Should i offer more and use FHA? Or offer slightly less and go the route of conventional?

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I would highly recommend going conventional unless you plan to refi after you reach 20% LTVR. Over the life of the loan you will be paying much less in mortgage insurance since FHA has change their guidelines. You have to pay mortgage insurance for the life of your loan, where as with the conventional you will only pay mortgage insurance for the first 20%.
0 votes Thank Flag Link Mon Dec 16, 2013
Great question. This has been a central concern for many home buyers over the last 18 months of this uber-hot market.

If you are going after a property 'too low to be true', you can forget about FHA. Most investor friendly buildings (big profit potential), even during these alleged owner occupant only stages, will go to cash buyers, or buyers willing to waive contingencies or put down a decent chunk of a down payment (20% minimum).

There are many theories why this is the case but I like to think it is because a bank's thinking mirrors that of a three year old.

I have lost FHA deals that were 20% higher than cash deals or high down payment deals. Remember the bank has often delayed selling their property for months, sometimes years, so the extra two weeks it would take to get FHA approval could really doom their property.

However, if you are buying from a traditional home seller and the seller's agent is reasonable, an FHA offer that is higher than the competing (by more than a few thousand but not necessarily exuberant) will be accepted in many cases. If the home needs considerable work, has illegal units, or the seller is trying to flee the country immediately, then your FHA offer will backfire.

If there are no other offers, and the property has sat for a bit, FHA at market value is just fine.
0 votes Thank Flag Link Mon Dec 16, 2013
It depends upon the sellers goals and expectations. If possible, have your agent put in a call to the listing agent to inquire as to whether their goal is higher price, or if they are more inclined to want to see a larger down payment. Sometimes sellers are uncomfortable with just 3.5% down, other times they don't care and its all about price. Ask if they have turned down any offers and if there are any offers on the table.
0 votes Thank Flag Link Wed Dec 11, 2013
It truthfully depends on what your comfort level is and how your lender is explaining and going over the different options for you.

What is usually done here is we lay out to our clients all of the different loan products and go over the different terms and conditions that may come from them.

If your lender has not done this and you would like some more detailed information surrounding the different scenarios.

Personally, it should not matter when placing an offer if your lender has done a basic analysis of the property and of your credit file prior to issuing the pre-approval letter.

Chris Diamond
Diamond Residential Mortgage Corporation
NMLS: 771882
0 votes Thank Flag Link Tue Dec 10, 2013
By far, conventional loans are far better as they require less hurdles from an underwriting standpoint.
0 votes Thank Flag Link Tue Dec 10, 2013

I agree with the answers you received so far. You do not have to put down 20% for a conventional loan as long as your score is high enough. Some sellers prefer that you have a conventional loan due to previous misconceptions of FHA loans being difficult to complete. There has been so many improvements to the program from the past that both are good options.

If you like more information, please call or email me and we can go over programs that will fit your situation.

Best regards,

Patty Harrison
Smart Mortgage Centers
0 votes Thank Flag Link Tue Dec 10, 2013
If your credit and income permit you to qualify for Conventional financing, then you are probably better off going that route. You don't necessarily need 20% down. You can do as little as 5% down conventional. And if your credit is good enough there are even options with NO PMI.

While FHA is a great program if you are credit-challenged or if you have high debt-to-income ratios, the downside is the PMI. FHA charges a 1.75% up front fee as well as monthly PMI that is generally more than conventional PMI. In addition, the PMI is much tougher to get rid of. If you only put 3.5% down then it is required for the duration of the loan which could cost you tens of thousands of dollars extra over the life of the loan.

Sounds like you got a very basic pre-approval without your loan officer really explaining your options to you. If you would like 2nd opinion from a true professional then give me a call or email me and I will walk you through the entire process and show you all your options and the pros and cons.

Tony Grech | Mortgage Loan Originator | NMLS 977416
PMAC Lending Services, Inc.
Toll-free (855) 642-4762 | Fax (248) 945-4842 | Direct (248) 728-0078
0 votes Thank Flag Link Tue Dec 10, 2013
By the way, if faced with a Conventional offer or a FHA offer, a seller will almost always go for the Conventional offer. FHA deals often add the burden of additional requirements to the seller
Flag Tue Dec 10, 2013
I'd recommend going 5% conventional. The difference between 3.5 and 5% is small enough not to diminish your buying power by much.
0 votes Thank Flag Link Tue Dec 10, 2013
It sounds like your offer with 20% down could be too low to afford the subject property. You should make your offer reflective of what it's worth given the comparable properties sold in the area over the last six months. If it takes an FHA loan to make an offer closer to the market value, then you should use FHA.
0 votes Thank Flag Link Tue Dec 10, 2013
Hi, AML:

I'm not entirely sure why you're considering an FHA loan if you qualify for conventional financing. Typically, buyers use FHA loans when their past credit history prevents them from getting a conventional loan. FHA is great for people who've had a bankruptcy discharged in the past 7 years, or who have had a short sale or foreclosure in the past 5 years.

If you have good credit, though, the purchase price you offer shouldn't change based on type of financing, since there are many conventional loan programs that have down payments equal or close to FHA, and debt-to-income ratios that are similar, too. Furthermore, FHA loans typically have a significantly higher interest rate than conventional loans, which might negate any possibility of offering a higher amount, since you won't qualify for as much money.

The truths about financed real estate offers are the following:

1. The higher the down payment, the more certain the loan is to close.
2. The higher the down payment, the lower the monthly payment and the easier it is for the borrower to qualify.
3. The worse the credit history, the higher the down payment must be and the higher the interest rate will be.

The above truths apply both to FHA and conventional loans. Both conventional and FHA financing require an appraisal that includes a property inspection. Some sellers think that the FHA appraisal is "tougher" than the conventional one, but this is not the case. The only difference is that FHA may require repairs (made by the seller) to approve the loan. In conventional financing, the repairs can be made after closing using a repair escrow allowance, from either the buyer's or the seller's funds. It may be the fear of having to pay for repairs that keep some sellers from signing your offers.

If your credit allows you to go conventional, then do so. You will pay less for your loan and will be more likely to get a signature from the seller. If your credit does not allow this, go FHA but select a property that's not likely to need repairs.

Finally, work with a REALTOR to help you to find the right property, based on your financing options. A REALTOR will know which properties will qualify for FHA and which for conventional only.

Good luck in your search!


Don Pasek, CIPS, TRC, ADPR
Omniterra Real Properties
0 votes Thank Flag Link Mon Dec 9, 2013
An offer based on a conventional loan will look stronger on the face of it to most sellers and brokers.
0 votes Thank Flag Link Mon Dec 9, 2013
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