Are FHA & Conventional Loans Alike?
September 24th, 2007
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Are FHA and conventional loans the same in terms of borrower benefits? Not at all, says Larry K Cragun.
Cragun, writing on a Seattle Post-Intelligencer blog, explains a number of areas where conventional and FHA loans differ. Edited for space and style, here are Cragun’s core points:
*With FHA there is no minimum FICO score requirement whereas with the My Community Program a 600 FICO is required.
*With FHA even if automated underwriting denies your file, that doesn’t mean that you can’t get the loan funded. It just means that the underwriter would have to make a manual decision on the file. This is important as I have never seen an underwriter override a conventional automated underwriting decision. We have closed thousands of files, not just a few, the sample is big. It just doesn’t happen and is the door opener for a loan officer to move you to sub prime. (Comment: This is critcally important because the cost of a subprime loan may be substantially greater than FHA financing.)
*One of the best advantages with FHA is that you have the flexibility of underwriters discretion. FHA is really a make sense type of underwriting whereas with Fannie/Freddie its black and white it works or it doesn’t.
*FHA allows up to 6% seller contributions and also allows temporary buydowns other programs do not allow. A temporary buydown is often justified and makes the loan make sense. A typical temporary buy down is 2% lower interest rate the first year and 1% the second. The difference in payments may make it work for you, also may make the proposed transaction work for the underwriter.
*Non traditional credit is also allowed through FHA and unlike Fannie one of the trade lines does not have to be rent.
*FHA also doesn’t have a maximum cap to the amount of income a borrower can make. The Up front MI can be paid by the seller using the 6% closing costs.
*In the past the stigma with FHA was that the sellers ended up having to pay the bulk of the closing costs which is actually no longer the case the only non allowable closing costs is the tax service fee. People also thought that with FHA it was more of a hassle because HUD would require all repairs even minor repairs to be fixed. This is no longer the case.
*Other things people don’t know about FHA is that if the borrowers run into trouble and cannot make their payment HUD will work with the borrower on a repayment plan so they won’t necessary go to foreclosure immediately they are really there to help the borrower.
“If you have a hint that you qualify,” says Cragun, “now is the time to talk with an FHA lender.”
Cragun’s comments, in turn, lead to several other postings which suggest additional FHA benefits. For specifics, take a look at what the Seattle paper has online.
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