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!
Chris, this is an interesting scenario and there is nothing illegal or unethical about it...but that still doesn't make it right.
In addition to having to come up with the 3.5% down payment, and possibly the closing costs (did the asset manager address seller paid closing costs?), the property will now be subject to an appraisal.
You lender will not loan you more than the home is worth - ie. the appraised value - as an appraisal is not required with HomePath, you are pretty close to hitting the nail on the head - Fannie can sell for whatever price they want because there is no support of the sales price with an appraisal, you do not need to come up with a down payment, and they will cover your closing costs.
So, to answer your question - it's not unethical or illegal, but yes - it's B.S.
Your option? If you have a strong Agent, fight for the sales price to match the appraised value. Your recourse - you should be able to back out of the deal and get your good faith deposit back.
One other thing you should be aware of - if you are using the same lender for the FHA loan as you were using for the HomePath loan - be acutely aware of the rate.
HomePath loans have much higher than market rates because again,with no appraisal and they cover the closing costs means they can sell the home for more than it's market value and the buyer asks fewer questions.
Make sure that the lender is not offering you a higher than market rate because, when compared to the HP rate, it's lower.
I know that's a lot to think about - I hope this helps.... more
Go with North Coast Financial. http://www.northcoastfinancialinc.com/ They have been doing hard money loans in Southern California for over 30 years. Fast approvals and funding with very competitive rates.