🏡 FHA vs Conventional 🏡

Hi, I'm Derek McGowan with the McGowan Mortgage Team and I wanted to talk about FHA versus conventional financing in the 2022 housing market. This is a huge one. I've seen a lot lately where FHA buyers are really having a tough time even getting their offers looked at simply because it says FHA on the pre approval. Now I know you know, traditional wisdom and in years past the person went FHA, it meant that they probably had a super low 600 or 500 high 500 credit score. That's the only way they can get approved. But if we look at a little closer, the regulations have really tightened up on what's required to qualify for conventional. That's one aspect that's pushing so many more buyers to FHA as the only option that gets approved. Fannie Mae and Freddie Mac have really tightened up the screws on their approval systems. The DU and lp, the automated underwriting systems. So it used to be you could get conventional financing all the way down to a 620 credit score. And that technically is still what it shows in rule book. But that's not the case in the daily, the daily interactions any lenders have. Their automated underwriting system are spitting those out. The lowest qualified credit score that I've seen on conventional loans since COVID started with 660. And that's really tightened up there. That was just a one off scenario for most people at 680 or above. And I've seen quite a few cases even recently where we have a 699 credit score. They have plenty of income, the debt to income is not tight, all other things look perfectly fine and you cannot get it approved and nowhere to get it approved. And it's just with conventional financing and it's just because it's today's market where they want him to get to 700 to then get approved for conventional financing. So that 699 credit score right now is walking around with an FHA pre approval. Doesn't mean the person's not qualified and can't get a super easy approval on a loan. It's just that's the one option in today's housing market. The other big one is, you know, FHA is much more lenient on the interest rates and the mortgage insurance. So if you're in that high 600 or mid 600 credit score range where you're kind of teetering on the fence of FHA or conventional, but FHA has the same mortgage insurance rate for everybody and their interest rate is, you know, let's say around 4% right now, no matter what the credit score is, roughly, it's a very small variance. Whether it's a 600 or 800 credit score, FHA holds the rate very, very closely intact. We can still get great financing or all the way through the credit score ranges. On FHA conventional, we have amazing financing if the credit scores there, but it really falls off fast. So the first phase is just getting it approved like we talked about originally, and it's been tougher than ever before getting it approved. Then once it is approved, if they're not in the higher credit tiers, the rate really falls off. We will go from maybe the high 4% right now if they have really good credit, to where if their credit's now dipping into the 600s, they could be well up into the 5 mid 5% as the only option. So would you take a 4% rate or a mid 5% rate and the higher mortgage insurance? Because the mortgage insurance providers are also getting a lot tougher. So all the way through the different phases of it, first getting the approval, then getting the best approval. Even if you have the options of conventional and fha, if you're in a buyer's position, you know, that really is a decision to make, man. Do I pay a whole percent and a half, possibly more for conventional because my credit score is kind of in the mid tiers and pay 100 bucks more for mortgage insurance? Or do I just stick with fha, get the better rate, get the better mortgage insurance? Maybe I could refi and get digital down the road. That is the daily conversations that a lot of lenders are having with buyers where even if they have the option, it might make more financial sense to go. FHA doesn't mean they're a bad candidate to buy a house or will have a tough time getting an approval. The other two topics, I feel like they get kind of misconstrued a little. One of them is the appraisal. I know that's a huge hot topic, but if you dive into it, there's only two parts, two major parts to an appraisal. The condition of the house and the value. Well, sure, FHA and va, they do require the houses to be moved in ready, so they are a little bit more particular. Absolutely. But as long as there's not glaring issues with the house, major repairs needed, that's all they're looking for. They don't. They're not so nitpicky as many might believe. Sure. On some things it can be like, hey, put a. Put A handrail here or things like that. But other than the major things, FHA and VA appraisals aren't that crazy on the conditions. It's usually the major glaring issues that a conventional appraisal very well could catch as well. And the value, there's no difference. The appraisers don't have two different grading methods, whether it's an FHA buyer or conventional buyer. And that changes the value of the home. I know to many that sounds very simple, but I have had those conversations pop up where a possible listing agent might think that, oh, I don't want this appraisal to come in short on value. So. So I'm not going to take an FHA buyer. That's a non factor. The appraiser is not looking at the value of the house compared to what's on the pre approval letter. That has no interaction there at all. The value of the house, the value of the house, it'll be the same whether it's FHA, VA or conventional financing or any of the other financings. So that's a moot point there. And then the last piece of it is, I feel like some people believe that an FHA loan is tougher to get approved. That's not really the case. It has to go through the same channels as a conventional loan does for 99% of the process. There's not, I mean, sure, conventional loans, if the person's putting 20% down, they have an opportunity to have an appraisal waiver. Absolutely. That's probably the big one. But aside from that, FHA follows the same overall major guidelines of a loan to get, to get an approval. I think possibly some lenders don't know FHA as well. I have ran into that because many lenders just focus on kind of the perfect, you know, 800 credit score and that's the only thing they know. But as long as you're not dealing with one of those lenders, then there's no reason why an FHA loan should take longer than a conventional loan to get a final approval to get the loan closed. I fortunately did start off my career only doing FHA financing. So I did learn how to work that. That did bring on some lower credit scores there. So I learned how to work through that and work through the channels of FHA. So now flash forward to today. We're now doing FHA, VA, conventional, USDA, non, QM, all of it. I still really value that time getting to know the FHA ins and outs. And I can certainly say there's not a major difference in how those loans get approved compared to conventional. So really, as you really dive into all the details, all the facts, there's not that big of a difference, a big of a variance. And I don't think the FHA pre approval letters should get shut down the way that they are. So that's my two cents. I'm Derek McGowan with the McGowan Mortgage Team, here to help homeowners monitor and navigate their way through the 2022 housing market.