Conventional Loan Vs FHA (Which Mortgage Loan is Better?)

Conventional Loan Vs FHA (Which Mortgage Loan is Better?)

What’s up guys it’s james allen the out-of-state investor and today we’re going to talk about which loan is the best way to go between a conventional loan or an fha loan now choosing the right type of loan can literally be the difference of saving yourself thousands of dollars or even saving yourself from getting locked into things that you might not realize is in

The fine print so just the fact that you’re watching this video right now is already a great start i’m gonna give you some great information today on both of these mortgages so that you can know for a fact that you’re getting exactly what’s in your best interest now before i get started do me a favor support the channel and smash that like button and if you haven’t

Already done so definitely subscribe and hit that notification bell to watch more content like this and with that said let’s jump into it all right so the way i’m going to break this down is i’m really going to go category by category as far as what you need to know when you’re looking at loans like this and compare what you’re getting with a conventional loan

Versus what you’re getting with an fha loan now the first place to start would be down payment now for your down payment on an fha loan you’re looking at a three and a half percent down payment from a one to four unit property so that means that you can get a single family with three and a half percent down and you can even get a fourplex if you wanted to with

Three and a half percent down now with a conventional loan you could actually go even less than three and a half percent down as low as three percent down but there are a little bit of rules and regulations that go along with that one of those is that one of the buyers has to be a first time home buyer or has not purchased a home in the last three years now if

That’s not you then the other alternative is you can also go for a five percent down minimum payment for your conventional loan and not only that but it also doesn’t qualify for two to four units you see for those bigger properties like a duplex triplex a four plex you’re gonna need to put down even more money for a duplex you’re gonna need to be looking at about

15 down and then for a triplex or fourplex you’re going to need to put as much as 20 percent down and again we’re talking about purely if you’re living in the property otherwise in that case it’s going to be even more money but right now we’re talking purely about living in these properties the next thing i want to talk about is your credit score you see the

Credit score that you have is going to determine the type of interest rates you get and not only that if you’ll even qualify for the loan in the first place for conventional loans you’re gonna start at a 620 minimum credit score that’s the absolute minimum to even qualify for the loan in the first place but at that rate you’re probably going to be getting a very

Expensive loan ideally you really want to be over 740 to get the best interest rates but at least at 620 you can still qualify now if your credit score isn’t as good as that you still have options with your fha loans you see fha loans will go down as low as 580 still keeping that three and a half percent down payment now if you have even lower than a 580 credit

Score the good news is the banks will still lend money to you they’ll still give you as long as you have a 500 credit score they’ll still give you an fha loan however if you’re under 580 you’re somewhere between that 500 to 580 mark they’re going to require a 10 down payment the next thing i want to talk about is removing your mortgage insurance premium now for

Those who aren’t aware if you put down less than 20 down you’re gonna end up having this thing called either pmi or mip basically the same thing but it’s basically an extra insurance payment that you have to pay to the bank because you put down less than 20 now what many people don’t realize is that with an fha loan the only option to remove this is by refinancing

Your loan if you don’t refinance the loan that mortgage insurance premium will never go away the only exception to that is if you actually did a 10 or more down payment with your fha loan then after 11 years the mip will finally come off now with conventional financing you don’t need to refinance in order to remove your mortgage insurance premium and this is a big

Deal because refinances cost thousands of dollars so if you can avoid that that’s putting a lot of money in your pocket with conventional financing once the balance of your mortgage is at eighty percent of what the original appraised value was that’s when you can call your lender up and ask them to remove pmi and when the balance drops to 78 percent the lender is

Already required to remove the pmi from the loan so if the house was originally appraised at 200 000 and your mortgage balance gets down to 160 thousand dollars which would be eighty percent that’s the moment when you can ask the lender to remove the pmi and on top of that with this recent housing surge that we’ve seen with prices going up at astronomical rates

If you have 20 equity today which basically anybody who’s bought a house in the last year or two probably is sitting on twenty percent equity even if you put down five percent so if that is you many times you can actually call up the lender and have them do an appraisal and if it appraises to where you have 20 equity you can actually remove the pmi even earlier

Than the seven and a half years or whatever it takes to pay down to 80 of the mortgage balance in fact that’s actually what i’m doing on a house i purchased this year the housing market has surged since i purchased the house plus i added value to it by fixing it up and so because of that i already have more than 20 equity in it so i’m already starting the process

To remove the pmi in less than a year it depends really on the lender though because some blenders may require two years of seasoning before you can do something like that some have no requirements whatsoever so you just need to call up your lender in order to understand what their requirements are the next thing i want to talk about are loan limits you see the

Fha loan and the conventional loan have different parameters as far as what they allow you to go up to as far as a loan amount now this is really going to depend on an area by area basis but overall they have a baseline level amount of what they offer for the majority of areas nationwide and then there’s loan limits for the more expensive areas like los angeles

Like new york or san francisco areas where the average price of the house is a lot higher than what the national average is so for fha loans the baseline loan limit for nation is three hundred and fifty six thousand three hundred sixty two dollars now for the ultra expensive markets like san francisco or los angeles they’ll go as high as eight hundred and twenty

Two thousand three hundred and seventy five dollars and remember this is for the loan amount not the purchase price so you could purchase at nine hundred thousand dollars but get a loan up to eight hundred and twenty two thousand three hundred seventy five dollars now in my market of phoenix fha will actually go up to 368 000 and that’s their adjustment for what

They see is fit for the market of phoenix now for comparison’s sake with conventional loans their baseline loan limit and this is nationwide is 548 and 250 dollars this is actually the same amount that it is for the phoenix market and if you go to the more expensive markets like los angeles or san francisco they’ll go up to the exact same amount as the fha loans

Which is eight hundred and twenty two thousand three hundred seventy five dollars so if you live in one of the expensive markets it’s really not going to make a difference which way you go as far as loan limit is concerned but if you live in a cheaper market like a phoenix it could be the difference of 200 000 of what you can qualify for now one of the biggest

Things that people don’t talk about enough is the cost of closing costs you see people don’t realize that closing costs are actually a lot more expensive when it comes to fha loans than closing costs and the big reason for that is there’s what’s called an upfront mip now we already talked about mip that stands for mortgage insurance premium now not only do you

Incur that as part of your fha loan and your conventional loans for that matter but you also have an upfront mip charge which is one point seven five percent of your loan amount so in other words if you were to get an fha loan in the amount of three hundred thousand dollars you’d have an upfront mip charge of five thousand two hundred fifty dollars added to your

Closing costs now if you don’t have that money and you’re still thinking you got to go the fha route the good news is that you can actually roll those closing costs into the loan which does increase your loan amount that you have to pay but at least it saves you that money come closing time and like i said this is really a thing for fha loans for conventional loans

You really don’t have to worry about any kind of charge like this which is why closing costs are way cheaper now when it comes to mortgage interest rates typically an fha loan is going to be a little cheaper than conventional loans but you really have to look at the credit score because that could really play a huge role in dictating what is more expensive now as

Far as mortgage insurance rates go it can get a little complicated because it’s not just about what your interest rate is you also want to consider your mortgage insurance if you’re putting less than 20 down you see you want to combine these two together so for fha for instance you have a flat .85 percent fee that you’re gonna be adding on to the loan so if you

Have a three percent regular interest rate and then you have 0.85 for your mortgage insurance premium your total combined interest rate is really going to be 3.85 now it gets even more complicated when you look at conventional loans because the better your credit score the lower the interest rate and it really has a strong effect on what your pmi cost is going

To be so it’s kind of hard to dictate which one you’re going to get a better interest rate on you really have to talk to your lender to have a real good idea of what that looks like but as a general rule of thumb if you have a really good credit score you’re probably going to be better off with a conventional loan and if you have a really poor credit score you’re

Probably going to be better off with an fha loan now one of the major differences between fha and conventional is fha has a lot more restrictions when it comes to appraisals and this is a big deal you see if you’re making an offer on a house sellers look at if you’re offering with an fha loan or a conventional loan because if you have an fha loan it’s going to

Come with a lot of restrictions that it won’t appraise unless it meets those expectations and some of those are things like the roof needs to be in good condition in general satisfactory condition for the house in general so if the house is a serious fixer-upper it could cause some serious issues or if there’s been some deferred maintenance on the house when the

Appraisal comes into play that may be the difference of even being able to close on the property altogether now this matters to you as the buyer because if you’re trying to offer with an fha loan a seller might see your loan versus a conventional loan and go well he may be offering more with an fha loan but i don’t know if it’s going to close i don’t know if the

House will appraise so conventional is definitely the more flexible loan as far as restrictions and things of that nature so if you’re looking for a fixer-upper house especially conventional loan is going to be hands down the way to go but even if you’re not looking for a fixer-upper and you just want to be more competitive in your offer and you just want to stand

A better chance of getting your offer accepted a conventional loan is always going to look stronger than an fha loan so anyways i hope you found this video helpful as you’re trying to figure out whether you’re better off with an fha loan or conventional loan i’ll tell you firsthand that i personally prefer conventional loans i find them to be better as far as the

Flexibility you get with being able to not having to refinance with your pmi and things of that nature but overall i hope you guys gained some value with this video and if you did do me a favor and smash that like button and if you haven’t already done so definitely subscribe and hit that notification bell to watch more content like this also let me know in the

Comments if you have any questions or feedback you want to give me and i’ll do my best to respond finally follow me on tik tok and instagram at the out of state investor thanks again for watching and i’ll see you on the next one

Transcribed from video
Conventional Loan Vs FHA (Which Mortgage Loan is Better?) By The Out of State Investor