Question on loans Conventional and FHA

5 Replies

So I met up with a real estate agent yesterday and I was talking about using an FHA loan but he was telling me how bad the FHA loan is. That I should go for a 5% conventional loan. Does anybody have any tips on what is the difference because I'm kind of confused because both of them you have to pay mortgage insurance until 20% of what I know. It was hard to get information out of him. I got the memo from him that $60,000 in California kind of by the beach I would not be able to Ford a house with a 3.5% or 5% loan down even though I want to house hack and have other people live in the rooms! I wasn't trying to buy it from him I was just having a conversation about the future for me and seems like he was trying to tell me it was impossible for me to start one day without having huge amount of money I'm 20 years old and I'm trying to get started in about five years getting my first place. With about $60-$100,000 hopefully all in let me know your guys thoughts thanks.

@Tommy Mckeown you can do 3 or 5% down conventional. You would only utilize FHA on a 2-4 unit with 3.5% down. The FHA loan product is not a bad one by any means if it helps you purchase your first property. Sounds like the realtor you talked with doesn't quite know what they are talking about! Always best to ask a lender about loan specific items as only 1-2 out of 10 realtors is worth their salt.

@Tommy Mckeown - with an FHA loan, you are going to pay both an upfront cost at closing and a monthly cost for Mortgage Insurance through the life of the loan. With a conventional loan you can opt to either pay the MI upfront or monthly, and you will pay it until you are at 80% of the original Loan to Value. 

Not everyone can qualify for a conventional loan, and FHA loans are more lenient with borrower credit profiles. Additionally, like was said above, FHA loans are especially advantageous when trying to buy a 2-4 unit property as you will still only have to put 3.5% down. With a conventional loan you'd be putting down 15% for a 2 unit and 25% for a 3-4 unit right now.

@Tommy Mckeown as an agent, I believe he was trying to convey the message that FHA offers will not be nearly as competitve nor frequently accepted, compared to strong conventional or cash offers. Deals fall out of contract all the time due to strict guidelines FHA imposes. Given the nature of today's market, seller's have the upper hand and plentiful of offers to choose from. I'm all for utilizing FHA when it comes to purchasing a 2-4 unit, but be aware, you're up against other buyer's that are bringing strong offers to the table. With your five year advanced timeline, the market could be in a totally different state, in which FHA may make sense then but that's pure speculation. Continue to establish relationships with other lenders so, when the time does come for you to purchase, you'll have all of your ducks in a row. Best of luck!

Originally posted by @Tommy Mckeown :

So I met up with a real estate agent yesterday and I was talking about using an FHA loan but he was telling me how bad the FHA loan is. That I should go for a 5% conventional loan. Does anybody have any tips on what is the difference because I'm kind of confused because both of them you have to pay mortgage insurance until 20% of what I know. It was hard to get information out of him. I got the memo from him that $60,000 in California kind of by the beach I would not be able to Ford a house with a 3.5% or 5% loan down even though I want to house hack and have other people live in the rooms! I wasn't trying to buy it from him I was just having a conversation about the future for me and seems like he was trying to tell me it was impossible for me to start one day without having huge amount of money I'm 20 years old and I'm trying to get started in about five years getting my first place. With about $60-$100,000 hopefully all in let me know your guys thoughts thanks.

 So, unpopular opinion: it doesn't really matter what the actual differences are

What does actually matter is that Realtors, including in all probability the listing agent of your dream house, think that FHA loans have these crazy absurd property standards making it impossible to close, or close on time, in 100% of cases.

None of that is true, at all (I could go over why Realtors believe that, it involves both self-selection bias and confirmation bias acting together, but that's not strictly relevant to your question), but that listing agent believes it's true, and will advise their seller client to throw your FHA offer in the trash, if they have any other options at all in terms of which offer to accept, which is very probable in this market... because, guess what, all your competing buyers also have Realtors, and they too are advising their clients to use conventional rather than FHA. So if even a single of your 15 or 20 competing buyers takes their Realtor's advice to use a conventional loan, that's who wins the property, all else being equal.