FHA vs Conventional Low Down Payment Mortgages for Home Buyers

It is a very competitive market for home buyers in the greater Seattle area. I’m finding that many of my clients who are using FHA for financing are not feeling the love from home sellers. It’s not unusual for home sellers, or more likely their Listing Agent, to steer away from FHA offers when a conventional offer is in hand.

In my opinion, this is largely due to an old bad reputation for FHA as being a tougher loan and/or that it would be more likely to have appraisal issues. If we are comparing a minimum down payment FHA to a minimum down convention mortgage, then this really isn’t an accurate view. If anything, with a minimum down scenario, FHA mortgages are more flexible than conventional mortgages and probably have higher odds of closing.

Appraisals for an FHA or conventional mortgage in today’s market are essentially the same.

So why would a home buyer opt for an FHA mortgage over conventional?

• Minimum down payment conventional programs, like Fannie Mae’s HomeReady or Freddie Mac’s Home Possible, have income limits based on geographic areas (some areas do not have the income limits for HomeReady).  Depending on where the home is located, FHA may be better for certain borrowers.
• FHA allows alimony to be treated more favorably than conventional mortgages.
• FHA has had lower interest rates than conventional mortgage lately. This may be offset by mortgage insurance…. (click here for a mortgage rate quote – for homes located in Washington state only).
• FHA has lower down payment options than conventional when a buyer is considering a 2-4 plex as their primary residence.
• Conventional mortgages have a much larger range for what mortgage insurance will cost based on credit scores. Home buyers who are doing minimum down payments  with a conventional mortgage could (currently) see rates ranging anywhere from 0.44% for excellent credit (740+) to 2.25% for lower credit scores (620-639). FHA’s annual mortgage insurance premium (paid monthly) is not credit score driven and is currently 0.85% for a minimum down 30 year fixed mortgage. Of course FHA also has upfront mortgage insurance which is financed into the mortgage.
• FHA has a shorter wait period for short sales and foreclosures than conventional mortgages.

If you’re selling a home or are a listing agent, I highly recommend that you reach out to the Loan Officers who are working with the buyers on the offers to give them a sniff. The lender may make more of a difference in how smoothly your transactions is than the actual program when you’re comparing minimum down conventional to FHA.

If you’re considering buying or refinancing a home located anywhere in the state of Washington, I’m happy to help you.