I’ve talked a great deal about VA Mortgages in these posts, and I have no doubt we’ll be touching on that subject again very soon as a lot has changed. But for those of you who are not lucky enough to be able to take advantage of the VA’s zero-down option, today we touch on the two most common choices for home buyers, Conventional and FHA.
Let me blow up one common myth right off the bat. You DO NOT NEED a 20% down payment to buy a home. This fairy tale has been floating around since the beginning of the recession in 2008. That’s more than 10 years folks and it’s as untrue now as it was then.
A significant percentage of first time buyers choose FHA, due in part to FHA’s less stringent requirements for down payment. Downpayment for an FHA mortgage can be as low as 3.5 percent. First time home buyers are also more likely to be living in the first home they purchase, also an FHA requirement. The home must be owner occupied as a primary residence.
The RIS Media piece below will give you a place to start, but talking with a qualified mortgage professional is critical. Most lenders do not charge an application fee, although in rare circumstances there may be a minimal charge up front for the credit report. (one note here, the credit report that a lender pulls is not the same as one that you obtain on your own)
Note: I maintain a long list of competent, experienced Home Loan professionals in the Greater Phoenix area who will discuss your options with you at no cost and with no obligation. Contact me at 602-999-0952 or golfarizona@cox.net if you’d like to get the ball rolling, I’m always happy to help.
So… Conventional or FHA?
If you’re planning to buy a home, you might choose a conventional mortgage or one insured by the Federal Housing Administration. It’s important to understand the requirements for each to make the right decision.
Comparisons of Conventional to FHA Loans
FHA loans are serviced by private mortgage lenders but insured by the FHA (the government or Federal Housing Administration). Conventional loans are not insured by the federal government.
Both FHA and Conventional lenders limit loan amounts based on location.
An FHA mortgage can only be used to buy a primary residence. A conventional loan can be used to buy a house for any purpose. In each case an appraisal to determine value will be required. To quality for an FHA mortgage, the appraisal would include some elements of safety and compliance with local building codes.
Your credit score will determine downpayment for an FHA loan, but the norm is 3.5 percent of the purchase price. If your credit score falls below a certain standard, you may still be able to obtain an FHA mortgage with a larger down payment.
To qualify for a conventional loan, you will most likely need a credit score of 620 or above, although exact requirements vary by lender so be sure to check with several different companies. With a conventional loan, it is possible to put down as little as 3 percent, but again, this will depend on your credit score. Both down payment and credit score will affect your interest rate.
To qualify for an FHA mortgage, your debt-to-income ratio (the percentage of your pre-tax income that you spend to pay your debts each month) can never be higher than 50 percent, and this does not apply to every home buyer. The norm for all debt / income ratio is 43 percent with housing and related expenses of no more than 33 percent. Most conventional lenders limit your debt to income ratio to 43 percent or lower.
Mortgage insurance compensates a lender if the borrower defaults on a loan. With a conventional loan, you would have to obtain private mortgage insurance if your down payment is less than 20 percent. In the case of FHA, the Federal Housing Administration insures the loan to cover the lender in the event of borrower default. The borrower or home owner pays the insurance premiums in their monthly mortgage payment.
Mortgage insurance premiums for an FHA loan are the same regardless of credit score, but with a conventional loan, a higher credit score means lower PMI premiums. Either way, the amount of your mortgage insurance premiums are based in part on the loan to value ratio.
It is possible to eliminate mortgage insurance premiums by refinancing an FHA loan. In the past you could partition the lender when your equity in the home reached 20 percent, and mortgage insurance might then be eliminated. Currently regulations state that you must refinance to eliminate MIP, but that’s not as daunting as it seems. The FHA Streamline Refinance is a fast and simple option for refinancing.
Get Expert Advice
The type of mortgage you choose will affect the amount you pay each month for years to come. Talk to a mortgage professional about your financial situation to decide whether your best option is FHA or Conventional.
Reprinted with permission from RISMedia. ©2020. All rights reserved.
For more information, Call or Text: 602-999-0952
eMail: golfarizona@cox.net
Bill Salvatore / Arizona Elite Properties
Your Valley Property Team
Residential Sales, Marketing, and Property Management
Founder: AZVHV Arizona Veterans Helping Veterans
Recipient: East Valley Tribune’s: Best Gilbert Realtor
There are still down payment assistance programs available in Maricopa and Pinal Counties.
Call us for details: 602-999-0952
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