FHA vs Traditional Loan

Asked by Cassandra, Hercules, CA Sat Dec 6, 2008

Want to put an offer in on a Forclosure that has only been on the market a couple days. How is the stregth of an offer precieved based on the loan type FHA vs Traditional? We are serious about this house but would like to preserve cash.

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Andre Shambl…, Agent, Miami, FL
Sat Dec 6, 2008
Good Evening Cassandra,

While many people deciding on a loan product rely exclusively on their lenders recommendation, you should understand the basic difference between an FHA loan and a Conventional Loan. The term Conventional Loan includes all loans under the current FNMA and FHLMC lending limits. Some of these may be called Conforming, A paper, subprime, Alt A, A Minus, BC (bad credit) and other industry names.

Most people that have heard of FHA loans tend to associate them with purchase money transactions. While purchases are the most common use, FHA loans are also available for rate and term refinance loans as well as Cash Out refinances.

The main advantage of a fha vs conventional loan is that the credit qualifying criteria for a borrower are not as strict as conventional loan financing and the down payment or Equity requirements are less. In comparing a purchase money FHA loan against a Conforming or A paper loan, the FHA loan will generally have the least amount of money required to close and the lower payment. FHA loans will allow the borrower who has had a few "credit problems" or those without a credit history to buy a home. An FHA Underwriter will require a reasonable explanation of these derogatories, but will approach a person's credit history with common sense credit underwriting. Most notably, borrowers with extenuating circumstances surrounding a bankruptcy that was discharged 2 years ago can be approved for maximum financing. Conventional A Paper financing, on the other hand, would require 4 years to have passed to be eligible for consideration and relies heavily upon credit scoring. If your score is below the minimum standard, you will not qualify or you will be place in a higher rate Subprime, Alt A or A minus loan product.

If a borrower does have past credit issues an FHA loan may be significantly cheaper than an alternative loan such as subprime, ALT A, or A minus. These other programs generally have higher interested rate of require a larger down payment or Equity position. Many of these alternative loan products have Pre Payment penalties where as FHA loan do not have such penalties. In fact FHA loans can be easily refinanced under the Streamline program.

Even though FHA charges an annual renewal mortgage insurance premium of 0.5% to .55% of the loan amount, this fee is generally half that charged by low down payment Conforming A Paper conventional mortgages (which range from 0.55% up to .96% per year). Subprime, Alt A and A minus rates range from 0.55% to 4.18%. For a $100,000 mortgage, FHA would charge approximately $41.67 per month and a typical low down (3%) conventional mortgage with a renewal premium of 0.78% would charge $65.00 per month. That's a $280 savings per year.

However, conventional financing does not require an upfront mortgage insurance premium when a borrower closes on the loan. With FHA financing, that fee for a 30 year loan is 1.75% of the loan amount that the borrower can wrap into the mortgage. On a $100,000 for 30 years at 8%, that's an additional $11.51 that the borrower must pay each month. That's almost an additional $132 the borrower must pay each year (fortunately the interest a borrower pays on his or her mortgage on a primary residence is tax deductible).

One drawback to FHA loans is that the loan limits set for FHA loans are typically less than the loan limits for conventional financing in most parts of the country. If a borrower is looking for a mortgage that exceeds the FHA loan limits for the area, the borrower would have to put additional money down on the property or finance under a conventional mortgage, Subprime, Alt A or A Minus product. Under the 2008 stimulus package FHA loan limits have been raised in many areas and FHA offer FHA Jumbo Loans.

For more information I recommend Jacinta with Apex Lending 877-662-7066
2 votes
Jerry Flynn, Agent, Clayton, CA
Sat Dec 6, 2008

There should not be a problem getting your offer accepted, using an FHA Loan, vs a Conventional Loan. As long as the property will Appraise, you should have now problem. FHA has become more lenient on the property qualifying, than it was years ago, when you had to have a termite clearance, including Section 1, and Section 2, cleared before they would fund a FHA Loan. Now they don't even ask for a termite Inspection at all, as long as it is not called for on the Purchase Contract.

Times have changed, so put your offer in using your FHA Loan, and you should be fine, as long as no one is offering CASH. Then you might have a problem. So go for it.

You have a Great day Cassandra.

Jerry Flynn
Old West Realty Inc.
Danville, Ca.
1 vote
Bernard Gibb…, Agent, Danville, CA
Sat Dec 6, 2008
I just wrote an offer on a bank owned foreclosure with an FHA loan. No problem at all. The bank countered the offer which we accepted but there was no mention of any concern about FHA. We ahve successfully written quite a few FHA based offers this year. Everything went very smoothly. Even closed a couple in 30 days.

I think the bank will be most interested in the amount you are offering :-)

Bernard Gibbons

Bernard Gibbons, Realtor, e-PRO Certified Internet Specialist
J. Rockcliff Realtors, 15 Railroad Avenue, Danville, CA 94526
Phone (925) 997-1585
1 vote
Jeff Kim, Agent, Blackhawk, CA
Tue Nov 30, 2010
Generally speaking in the market today (I know this is an old post, but I wanted to relate it to current conditions) my experience has been with REO and short sales, banks are more inclined to go with cash first, conventional second and then FHA., VA, etc. All things remaining the same. However, should the all cash offer place a "low ball" offer and the conventional loan places a solid offer, I have had clients with the conventional loan trump the all cash.
0 votes
Fri Jul 9, 2010
w+e are over 55 how does a fha 55+ work? How do we qualify? House we are looking at says "FHA 55+ "
0 votes
Robert Chome…, , San Diego, CA
Mon Dec 8, 2008
Unfortunately in my market in San Diego, there is still a *perception* among some selling brokers/banks that FHA is a more difficult close. So with all things being equal, I think the bank sellers will take a conventional offer over an FHA offer. But FHA loans are becoming a huge percentage of all loans originated in the U.S., so they are accepting FHA offers as well b/c they have to if there are no other equal or better conventional loan offers.

In reality (other than potential health & safety fixes required by FHA), I actually think more things can go wrong before close with a conventional loan, since fannie & freddie have more difficult credit and asset underwriting requirements than FHA. FHA is very lenient on credit and they don't require any cash reserves after close.

If you go with an FHA offer, maybe put up a larger deposit to offset the fact it's an FHA loan. And show your proof of funds in the bank with your purchase offer.
0 votes
Tommy, , Fort Lauderdale, FL
Sun Dec 7, 2008
THE FHA is the way to go, there are so many advantages to the FHA loan I dont even know where to start.

Credit is Not necessarily. A perfect credit score can help, you do not need perfect credit to refinance with a Florida FHA loan. There are certain standards that you have to meet, of course, but they are not as strict as with traditional loans. Even in instances where credit is not ideal, a lender will be more likely to grant you the loan because of the guarantee on the loan.

If you're going with a traditional mortgage loan, you are usually required to put down 20% of the loan as a down payment. But what do you do if you are unable to make a large down payment? Even if you are unable to make any down payment, an FHA loan can help you. First of all, they usually only require 3% of the loan as a down payment. Even if you cannot meet the 3%, a Florida FHA loan will allow you to receive the 3% as a gift. Usually traditional lenders do not allow gift funds as down payments.

0 votes
Susie Genet, Agent, Tulsa, OK
Sat Dec 6, 2008
It used to be that FHA loans were considered more difficult to work with due to tighter requirements on the properties. However, over the past couple of years, FHA restrictions have loosened significantly and sellers do not seem them as weaker with an offer. The property will need to be in good enough condition to pass FHA appraisal requirements. Your realtor should be able to advise you on this.
0 votes
David, , La Jolla, CA
Sat Dec 6, 2008
A loan is a loan.... if you have ample down, it will strengthen you offer. However, as long as you provide the seller notification of a lender change in escrow you can start with any loan and change it if need be..

In other words, going in with the strongest offer and then weigh your options as you do your due dillegence...

In this market, I can not stress enough to find a realtor that is worth his weight in gold. Please Please Please do not rely on message boards like trulia. They serve a purpose but nothing is better than hearing it from a pro in your face.
Web Reference:  http://www.renter2buyer.net
0 votes
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