Home Buying in 60608>Question Details

AML, Home Buyer in Chicago, IL

Which is better FHA (higher offer) or Conventional (lower offer)

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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Answers

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Hello,

There are several perspectives to this questions, as evidenced below.

Depending on the "bidding" scenario, i.e. multiple offers, they are pretty common place now-a-days...a higher bid will almost always win, however, a conventional buyer may get the home simply because it's a stronger loan product...It really is not that simple but roughly.

If you are not working with a Realtor you really should be.
0 votes Thank Flag Link Fri Dec 13, 2013
The FHA payment will be about 1,260 with 3.5% down ($6,125)and all closing cost paid by lender because of higher interest rate. You can do 95% ($8,750 down) conventional with lender paid mortgage insurance and the payment would be $1,100 per month and most closing cost would be covered by lender because of a higher rate used in this example. Or you can go 80/10/10 and your payment will be $1,095. The second is $17,500 HELOC which is an adjustable interest only loan at first. My vote is for the 2nd option with lender paid mortgage insurance (LPMI) conventional. The advantages to FHA is you can use very limited credit and it's a lot easier to qualify, the loan is also assumable which can be a big selling point later, and the down is smaller which doesn't help you. FHA and conventional underwriting is both easy, but the FHA appraiser has to call safety and health issue which conventional appraiser don't have to call.
0 votes Thank Flag Link Thu Dec 12, 2013
AML,
I hope you've resolved your concerns by now, but just in case there is another option which may be available to you. One of my main lenders sent me a flyer regarding an 80/10/10. This program allows a qualified buyer to do an 80% first mortgage, a 10% second mortgage with 10% down. This allows the borrower to avoid the need for mortgage insurance. You can pay off the second mortgage early if you have available funds and the payments on this portion are typically very low.
The downside may be that the second mortgage is generally an adjustable rate loan which if kept over time could go up substantially. It's also tempting to just maintain the minimal payment which is commonly an "interest only" loan, so you can pay on it for years and not reduce your principle.
For a full explanation of the pros & cons, talk to your lender.
0 votes Thank Flag Link Thu Dec 12, 2013
Nothing about this question sounds right to me, the way it is worded gives me the impression you are not working closely with a Realtor. That would be a much bigger concern than what type of loan you are using. But I am curious, how do you intend to finance if the offer is significantly over the asking price? The lender is going to use the lesser of the appraised value or the purchase price for calculating the down payment that is required. In plain English that means you must pay the amount that exceeds the appraised value in cash and that portion is not considered as down payment for calculating the loan-to-value for MI or PMI. Good luck,

Jim Simms
NMLS # 6395
JSimms@cmcloans.com
Financing Kentucky One Home at a Time
I answer questions about financing real estate based on my decades of experience dealing with mortgage underwriters. This answer is my personal opinion, has not been reviewed or approved by the company I work for. I do not offer legal or tax advice, if you need answers from an attorney or CPA find one knowledgeable in your local market.
Web Reference: http://jamessimms.com/
0 votes Thank Flag Link Thu Dec 12, 2013
Cash will win overall, but conventional will not worry them as much as FHA will.
0 votes Thank Flag Link Thu Dec 12, 2013
I say go for the 3.5% down and use the rest for a tv and a deck
0 votes Thank Flag Link Wed Dec 11, 2013
Is there a reason why you think you need to put 20% down to qualify for a conventional loan? With good credit you can obtain a conventional loan with as little as 5% down. I would be happy to do a full analysis for you. Feel free to contact me at your convenience.

Matthew Roder
VP of Mortgage Lending
Guaranteed Rate
630-388-9533
matthew.roder@guaranteedrate.com
0 votes Thank Flag Link Tue Dec 10, 2013
Is the building you are trying to buy in FHA approved? This is very important to know...
0 votes Thank Flag Link Tue Dec 10, 2013
If you qualify for a Conventional Loan try to use this type of financing - It is less costly for you.
0 votes Thank Flag Link Tue Dec 10, 2013
Market offer with the loan product that best fits the buyer's needs.
0 votes Thank Flag Link Tue Dec 10, 2013
AML,
Try if you can to tune out the babble.
Your reality is, you make above list price offers with FHA backed financing and you were unsuccessful.
Time for you to meet up with your agent and discuss why FHA backed mortgages are not competitive. YOUR EXPERIENCE reveals they are not.
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The second fantasy you embrace is that there is a difference between FHA or CONVENTIONAL cash. IT's ALL cash at the closing table.
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The total amount offered, as you have discovered, is NOT the most important factor.
I will let YOUR REALTOR reveal what is the most important factor to a seller and how you can construct a better FHA offer or a more beneficial conventional offer.
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Let me be more specific, what you have identified in your question as the elements you want to tweak will make NO DIFFERENCE regarding making a successful purchase offer. Time to consult with a pro and acquire a house you an call yours.
0 votes Thank Flag Link Tue Dec 10, 2013
You should offer what the property is worth based on past comparables. Why offer more just because of the type of loan you have????
Conventional is always better than FHA if you have a choice. FHA is very picky about the condition so if that might be an issue just go conventional
0 votes Thank Flag Link Tue Dec 10, 2013
Depends on the property ..but FHAs have a big mortgage insurance
0 votes Thank Flag Link Mon Dec 9, 2013
Definitely depends on the property as to how a seller might view it, BUT there are extra costs associated with doing FHA (rolled into the mortgage, or closing costs), and if you have the ability to put more down and go conventional, you should.
0 votes Thank Flag Link Mon Dec 9, 2013
Call a lender directly.

However, I would never ever ever do FHA over conventional. Ever. ...Ever
0 votes Thank Flag Link Mon Dec 9, 2013
Get a Realtor will ya?! If you dont have a Realtor representing you, your offer may seem unprofessional as you are lacking professional expertise when it comes to writing and presenting an offer.
Each situation is unique. The entire offer is looked at, not just purchase price. Financing is a key element. 20% down conventional is arguably stronger than fha but either one has the same chance of closing depending on the property. In a condo, i'd definitely go conventional so there are less contingencies to meet. That makes your offer more attractive.
0 votes Thank Flag Link Mon Dec 9, 2013
In that price range it sounds like you may be competing with cash buyers -- if that's the case, they will have an edge every time. Coming in with a higher priced offer may be the only way to win the bidding war. Has your lender explained the option of pre-paying your PMI in order to qualify for a higher loan amount? What areas are you looking in?
0 votes Thank Flag Link Mon Dec 9, 2013
The best offer is the one that closes. Some buildings will not qualify for FHA based on condition as FHA has appraisal with FHA inspection.
0 votes Thank Flag Link Mon Dec 9, 2013
I think you need to find an agent in the area that you're looking that can help you evaluate your concerns. Besides the matter of the amount down, and multiple bidding, there are other issues your agent will point out to you, especially if you are willing to consider an older home in need of some repairs which might be an issue for an FHA loan, but not necessarily for conventional. If you are finding yourself in multiple bidding situations, you should remember that the highest bid is not the only consideration for the seller, especially if the home won't appraise for what you offered!
0 votes Thank Flag Link Mon Dec 9, 2013
AML,
It's really a whole package consideration when an offer comes in. As a buyer, you would be financially better off with 20% down, no mortgage insurance and a stronger equity position. However this may limit the options available to you in your next home. If you find a home that you love, plan to be in for at least 3-5 years or more and can afford with conventional financing, you may be better off in the long run.
Now, to confuse things a bit you do have other options. Conventional financing with 5% or more down exists in many markets and the Mortgage Insurance is less expensive than FHA and will go away when you have enough equity.
Discuss your full situation with your lender. They have all your facts, will better know your market and your goals. Our answers here are subject to our limited understanding of your situation. Best of luck.
0 votes Thank Flag Link Mon Dec 9, 2013
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