Why I (almost) Always Recommend Conventional

Sometimes a home buyer will call me and say they were referred to me for a home loan. My first response is typically "YEA! That's awesome!"  I'll then ask if they've gone through the preapproval process before and they'll often say that, yes, they're preapproved with another bank but don't wish to work with them any further (typically because of poor communication).

I then typically ask if they recall what type of loan they were preapproved for and they'll often say "They told me FHA financing, but I have no idea why....."

That answer saddens me because it points out a common weakness in my industry.  Lenders have a tendency to tell buyers what loan we think they should use instead of giving them the pros and cons of multiple options and letting them decide.

Sometimes FHA is the right fit for a buyer. Sometimes, it's the ONLY option for a buyer. There are many times conventional financing is an option too though. When Conventional is an option, it will (almost) always trump FHA in my eyes.  Let's review why:

• Lower fees:  FHA currently charges a home buyer an upfront fee equal to 1.75% of the mortgage amount.  This fee is rolled into the loan so the buyer doesn't pay it upfront, but if they borrowed $100,000, they're going to owe $101,750 right out of the gate.  Conventional loans don't charge a fee like this.
• Lifetime mortgage insurance:  When a home buyer is not putting 20% down on a loan, they typically pay something called mortgage insurance as a part of their monthly payment.  With a conventional loan, that piece of the payment will automatically fall off and the monthly payment will become lower once the buyer has built up 22% equity in the house (they can request it be removed at 20% equity).  With FHA loans though, that mortgage insurance typically stays for the life of the loan.  
• Lower down payment:  People often think they need a bigger down payment for conventional loans. Not necessarily though. There are several 3% down conventional options available these days. FHA requires 3.5% down.  
• Simpler property standards:  FHA has a higher bar on property conditions which can make the home purchase more challenging.  For example, if the home is a flip, FHA has rules on how long the seller needs to have owned the home (conventional does not). Also, FHA is picky about peeling paint on homes older than 1978 and will require it to be scrapped, sanded and repainted before the loan closes. Conventional financing doesn't require this.

Now are there reasons why FHA might be a better fit for a buyer? Absolutely!  FHA is more willing to approve someone with a lower credit score and it's more flexible with previous bankruptcies and foreclosures.  It also can offer a lower  interest rate or cheaper mortgage insurance in some situations which should definitely be considered in a loan selection.

The problem comes in when a lender thinks 'Well, I know they'll be approved FHA, so we'll just go that route' instead of exploring the FHA vs. Conventional option more deeply and giving the buyer the information to let them decide what fits them best.  Yes, it can be more difficult to get a loan approved for a conventional loan sometimes, but if it's best for the buyer, it's worth the extra work.

Given all the advantages of conventional financing, it's almost always my first choice for a buyer who qualifies. Why only 'almost', you say? Because I love love LOVE VA loans even more. To learn more about VA financing, feel free to click here - VA Loans - The Flax Seed of Mortgage Lending.

Bottom line, there is no one right answer for all buyers. Each loan situation is unique. Each home buyer's goals and priorities are different. A lenders role is to review their situation and help them decide which of the available options suit them best.

To learn more about the loan options that give the best benefit to you based on your scenario and goals, feel free to contact me at lori.hiscock@ruoff.com.

To learn more about the products covered here or any other aspects of home financing, contact Lori Hiscock at lori.hiscock@ruoff.com.  

Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here. NMLS#404320.

Ruoff Mortgage Company, Inc. is an Indiana corporation licensed by the Indiana Department of Financial Institutions (DFI) and operates with the following licenses:

Indiana-DFI First Lien Mortgage Lending License #10994;
IL Residential Mortgage Licensee #MB.6760734;
Michigan 1st Mortgage Broker/Lender License #FL0017496.

Ohio Mortgage Broker Act License #MBMB.850220.000

The Florida Office of Financial Regulation License #MLD1182