FHA vs. Conventional Loans

FHA versus Conventional. What is the difference? Hi, I’m Ledeana with Homes By Strand and RE/MAX Town & Country in Port Orchard, Washington. And we’re gonna get started right now. I’m going to discuss the short version because the difference of these two loans can actually get quite complicated. But my teaching style, let’s keep it on the surface and let’s get it to where you guys can immediately know the difference between the two and then you’re going to know which one that you really need to research more with your lender, of course. Alright. So conventional is a private sector loan that is not backed by The Federal Government. It has what’s called private mortgage insurance which is called PMI, private mortgage insurance. Super simple. FHA on the other hand, that is a private sector loan as well but it’s backed by The Federal Government. And it has what’s called MIP, mortgage insurance payment that is required. Alright? Now that MIP, that is insurance for the lender. That is not your insurance as the borrower. That is insurance on the loan, okay? And that is where The Federal Government says, “Hey, we’re guaranteeing that you’re “gonna get a portion of this loan back from us.” They get a percentage that they loaned, alright? And then those MIP payments that stayed for the life of the loan, that’s also your insurance per se. Now how all this gets broken down and where that money goes and how it’s spent, that’s not something that we need to be focusing on. What we want to be focusing on is what is the difference between MIP and PMI is that their both mortgage insurance. But one, is you’re paying the government and the other one is that you’re paying a third-party, okay? Now the major difference, like I just said is that MIP is for the life of your loan. So as long as you own your property and as long as you are making your payment, then you are making the MIP part of your house payment. With conventional, when you have the PMI, you can drop that insurance off once you have hit 20%, alright? So when you have paid down at least 20% of what you originally borrowed, you no longer have to pay PMI. And that’s where the biggest myth and confusion comes from, is because a lot of people think that when they get a conventional loan that they have to put 20% down at the gate. And that’s just not true. There are some conventional programs out there where you can put as little as 3% down. Now, the fees between FHA loan and a conventional loan are completely different. You’re always gonna have your lender origination fee which that lender origination fee, that’s how you paid your lender to do their job for you and to fund this loan and to broker the paperwork, alright? But then there’s also, there’s some other fees that what are called program lending fees. And those are going to be different between the two. That’s why it’s really important that if you know the surface difference between the two, then you’re really gonna know which one is gonna be the best loan option for you, not only today but long-term, alright? Because the biggest mistake that I see clients make is that they want to get into a property right now. And so they’re looking at their finances right now, which that is important, correct? But sometimes, instead of waiting a month or two and having a little bit more money to put down, they don’t realize how much money they would be saving long-term by changing the program. So that could be does your credit score need to come up a little bit more? Do you need a little bit more money to put down to where you can get into a different program? Or do you need a little bit more money so you can actually buy the interest rate down? I mean, those are all things that a good lender should be explaining to you. And these are questions and things that you need to be aware of so you know what to ask, alright? But here’s a couple of other differences that, in my opinion, are pretty vital to understand. There’s a common myth. A lot of people think that because FHA is a government-backed loan that it’s harder to qualify for an FHA when it’s actually quite the opposite. And the reason why a lot of people are confused with this is because with an FHA loan, you actually have to have two sets of qualifications you actually have to meet. You have to obviously meet the lender, the banks, the personal private guidelines, and then you also have to meet the government guidelines. Because again, if the government is going to back the loan, you can bet your bottom dollar you’re going to have to meet certain requirements in order for them to guarantee a percentage to the lender. But the great thing is, is that most everybody meets the government’s qualifications and I stress on most, alright? But here’s the thing. When the lenders know that they’re guaranteed to get a percentage of the originating amount back, when you know you’re getting a portion of that back, they’re a little bit more relaxed on that whereas, when you get a conventional loan, nobody’s guaranteeing that lender that they’re going to get any money back should you as the borrower default. So the conventional loans, those are actually the ones where the standards are a little bit higher and they’re not really hard to meet, it just takes a little more legwork as the borrower. So you have to have a little bit more proof per se. You have to be able to submit some more paperwork because again, you have one lender that’s not guaranteed to get anything and then you have another lender that’s guaranteed to at least get something. So, does that make sense? Now, we can get into the nitty-gritty of what those requirements are but I think for the purpose of this video, I think it’s really important that we just stick with the basics because your lender should be able to explain to you your own personal circumstances. So that’s why it’s really important that people understand that conventional loans are not scary. If you have the paperwork, if you can show your proof in the pudding per se, then sometimes a conventional loan is actually the best way to go because interest rates are typically a little bit lower. And why is that? Well, because when you’re paying a higher percentage rate on the FHA side, that’s also because a portion of that is going towards the government-backed portion. Does that make sense? So, it’s super simple. You just need to find a really great lender who is really able to explain what their programs are and how they differ. And that, folks, is your tips for today. And if you need a good lender, I have a slew of them. And why do I have more than one? Because every lender that has different programs that will meet different criteria. That’s why a good agent has more than one. And you can bet your bottom dollar, I’ve got just the one should you need one. That’s it for today. We’ll see you next time. Don’t forget to hit the subscribe button below and also the little bell notification down below as well, so you’re kept in the loop and up-to-date on this home buying thing. And you don’t wanna miss any important information that I’ll be sharing with you in the coming weeks. And thank you so much for watching my video. I hope to see you soon. And bye for now.