I just received a newsletter from a local real estate agent which had an article about whether buyers should opt for a conventional or FHA loan. I’m pretty certain the real estate agent didn’t write the article, however the author, whoever they are, got a lot of things wrong regarding these two mortgage programs. Many of the items that were wrong are what I think are fairly common misconceptions with these two popular mortgage programs. So I thought this was a grand opportunity to write a post to correct them…I’ll skip the fine hairs 😉
Conventional Mortgages
With conventional mortgages, you have both conforming and non-conforming (aka jumbo) mortgages. I’m assuming the article is probably referring to conforming mortgages (mortgage loan amounts that do not exceed the conforming loan amount)…however, I’ll cut it some slack because some of the references may apply more to non-conforming/jumbo loans. The italics are quoted from the article/email-newsletter that I received.
Debt to Income Ratios: The article references that the typical debt-to-income ratio (aka “dti”) for a conventional loan is “at most 43 percent”. This is false. Conforming conventional mortgages will actually exceed 43% as long as the lender receives an automated approval from underwriting. In fact, some of the programs that are geared towards first time home buyers with lower down payments, like Fannie Mae’s Home Ready or Freddie Mac’s Home Possible, the debt to income ratio can be as high as 50% of the gross income.
Down payment: The article states that “the typical down payment is 20 percent of the purchase price” and you can possibly put down less if programs are offered in special areas. Not true!!! Home Ready, Home Possible and Home Advantage all have low down payment options – in fact, some are even lower than what FHA offers. In some areas and some programs may have income limits, and there are some areas without income restrictions.
“Processing time: The time it takes to get approved for a conventional loan can be much quicker than that for an FHA loan. This is because the borrower works directly with the lender, not a government agency that acts as a middleman“. ARGH!! Another misstatement! There is no difference in processing time between conventional and FHA financing. With FHA, the government does NOT act as a middleman. At Mortgage Master Service Corporation, we process and underwriting our conventional conforming and FHA loans at our corporate office. The only government loans that have a “middleman” involved which would cause a delay is a USDA loan. Sorry for the rant on this one – but I really get tired of FHA loans being inaccurately portrayed. Rant over…for now…
FHA Mortgages
Debt-to-income ratio: Forty-three percent is standard. FALSE! FHA will go much higher than 43%. Like conventional, acceptable debt-to-income ratios rely a lot on automated underwriting. It’s not unusual to have debt to income ratios as high as 55% depending on the borrowers scenario.
Down payment: “Unlike conventional loans, those seeking an FHA loan can put as little as 3.5 percent down“. FALSE! Some conventional programs will allow less than FHA’s minimum required down payment. Where FHA does allow for a lower down payment than conventional is when you’re looking a “high balance” loan amounts. “Conforming High Balance” or “FHA Jumbos” are loan amounts that exceed the standard loan limits in higher cost areas, like the greater Seattle/King County area. Actually all of Snohomish and Pierce County have “high balance” loan limits for conforming and FHA mortgages. FHA Jumbo down payment requirements are lower than high balance conforming.
“Processing time: The processing time for an FHA loan can take longer than that of conventional loans. This is because borrowers are going through a government agency to acquire a loan and not working directly with the lender. Underwriting tends to take the longest time.” FALSE!! As I explained above, unless you’re doing a USDA mortgage, you are working with the lender. This is a terrible misconception.
Bottom line, whether or not you opt for an FHA or a conventional mortgage should be a discussion that you have with your local licensed loan officer. FHA mortgages may have a stigma because of inaccurate information such as this article.
If you’re interested in buying a home located anywhere in Washington state, I would love to work with you!
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