• FHA Loan VS Conventional Mortgage: How To Choose Your Loan Program

  • Your Complete Guide to Choosing an FHA Loan or Conventional Mortgage When Buying A Home In MichiganFHA VS Conventional Mortgages: How To Choose Your Loan Program In Michigan

    Loan Programs and underwriting guidelines constantly change in the mortgage industry. It is a smart idea to review loan program information often during a new home search.

    Most people buying a home in Michigan come to the spot where they have to choose between an FHA Loan or a conventional mortgage. It is taking folks much longer to find a home and get an offer accepted because of the current low inventory; so it is common for the rules to change during this process and catch people off guard.

    The Differences Between an FHA Loan and a Conventional Mortgage

    Let’s take a look at the main differences between the FHA Mortgage and Conventional Mortgage:

    • Down Payment Options:              
      • FHA Loan:                      3.5% minimum down payment.
      • Conventional Loan:    5% minimum down payment is required.
    • Mortgage Insurance:
      • FHA Loan:                      Upfront Mortgage Insurance & Monthly Mortgage Insurance is required.
      • Conventional Loan:    Monthly Mortgage Insurance is required.
    • Debt-to-Income Ratios: 
      • FHA Loan:                      The FHA loan will often allow for expanded debt-to-income ratios up to 56% in certain circumstances.
      • Conventional Loan:    Typically the Maximum Debt-to-income ratio is in the range of 41-45%.
    • Appraisal Requirements: 
      • FHA Loan:                      A full, interior/exterior appraisal report is required.  Any repair items that affect the security, safety, soundness and economic longevity of the home must be addressed.
      • Conventional Loan:    Most Purchase loans require a full, interior/exterior appraisal.  The appraiser is also supposed to address the same issues as the FHA appraiser.  Some conventional loans will not require a full appraisal if the borrower’s credit, income, assets and down payment are very strong.
    • Gift Funds Used For Purchasing A Home:
      • FHA Loan:                      The entire down payment can be gifted as well as the closing costs and pre-paid items.
      • Conventional Loan:    The entire down payment can be gifted if it is for a 20% down payment.  If the gift is less than a 20% down payment, the borrower must have at least the amount of the down payment in their own funds.

    How To Decide Which Loan Option Is Best For You?

    FHA has continued to increase Mortgage Insurance rates since 2010 (due to a substantial increase in market share) which makes Conventional Financing less expensive per month, thus borrowers have more equity at closing.

    When you factor in the monthly savings along with the Seller’s possible anxiety about an FHA Mortgage , Conventional Mortgages are the best, #1 option.

    When Must You Choose A FHA Mortgage Loan?

    FHA is still a strong second option for borrowers. It is also a required option if you do not qualify for conventional financing by falling into one of the following categories:

    • Borrower has less than 5% of the Purchase Price in cash available
    • Borrower’s Debt-to-Income Ratios are too high for Conventional Financing
    • Borrower’s Credit Score is under 680
    • Borrower has gone through a Foreclosure or Short Sale in the last 7 years

    As a Michigan Mortgage Broker, we will always take the time to speak to you one-on-one to help evaluate these options and find the best loan program, rates,  and terms that meet your needs. Give us a call, or request a free, personalized mortgage rate quote to help make this decision.

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