Comparing FHA vs. Conventional Loans with Dan Ardis - Bakersfield Real Estate

Thinking about getting your home finally in Bakersfield real estate? Have an FHA loan, well you are in luck, the information that I am to bestow upon you is like a gift for buyers with FHA loans.

In this piece of writing, I’ll briefly go through a comparison between FHA and conventional loans and in this comparison, I am not alone, in the live stream that we held about it. Dan Ardis from Joaquin Valley Mortgage was accompanying me.

The comparison and the news that was covered in this stream or article were all thanks to Dan Ardis who was in charge of that stream in this case.

Anyway, without any further ado, how about we get to it?

Table of Content

🏘 Good News for Buyers with FHA Loan!

🏘 What Exactly are these Changes in Comparison with other Loans?

🏘 FHA vs. Conventional Loan

🏘 FHA Loan Appraisal Policy

🏘 Can you Swap between an FHA loan and a Conventional Loan?

🏘 Why FHA can hold its own in the Real Estate Market.

🏘 Conventional Mortage Insurance

🏘 Frequently Asked Questions

Good News for Buyers with FHA Loan!

StartupStockPhotos / Pixabay

Let’s start with some great news that will gather the attention of all the buyers with FHA loans, OK, OK, enough waiting, the news is that FHA has scraped off a chunk from their premium, in other words, FHA lowered their mortgage insurance premiums.

The thing is, they have gathered way more than they need for the last 2-3 years and because of pressure, they lowered it to around 0.55% instead of 0.85%. Yes, you heard it right, it’s good news!

However, it might not be for everyone as it’s supposed to be for the FHA case numbers that are pulled after March 20th. It’s still great news. As per Dan’s calculations, it will save over $100 per month because of this little change.

So, in Bakersfield real estate, if you have the range of 400k, this change alone will add about $17,000 more purchasing power because the ratio between debt and income will be the same.

Why did this happen?

As already mentioned, they gathered way more than they needed, and since these loans are mostly successful and the default ratio is really low, so they don’t need that much saved.

A lot of people are still confused about mortgage insurance but in easy words, the insurance for the lender in case the buyer defaults. In the case of FHA loans, you will always get mortgage insurance.

Show less

What Exactly are these Changes in Comparison with other Loans?

nattanan23 / Pixabay

Usually when buying a house a client that puts 5-10 % down payment ends up with a better interest rate of about 0.50% annually.

With the FHA loan, you only put in a 3.5% down payment and can enjoy an annual interest rate of 0.55%, which if you think about it, is way better than 0.85%.

Of course in numbers, 0.50 is better than 0.55% but you need to put in more down payment and if you put in more than 10% you’ll still get a 0.50% interest rate, but the good part about this is, that it will go away in 11 years.

These numbers are for buyers with a mortgage term of over 15 years.

FHA vs. Conventional Loan

jconejo / Pixabay

The thing about FHA is that once you build your equity up to 80% loan to value, you need to refinance an FHA loan after that. On the other hand, with a conventional loan, you don’t need to refinance since the mortgage insurance will just go away.

Foreclosure event FHA vs. Conventional.

For an FHA loan, you do need to refinance but in case a buyer went bankrupt in the past, the FHA loan allows you to refinance within 3 years since it’s backed by the government. Of course, bankruptcy paperwork is required.

With a conventional loan, however, you have to wait a long time. Around 7 years beyond the discharge date before you can re-apply. So, that’s why refinancing in FHA can be better for past bankruptcy.

Interest Rates FHA vs Conventional

The other thing to compare is interest rates, but in Dan’s opinion interest rates are not the consideration of most buyers, they just opt more towards the loan that offers the least monthly payment per month.

That means the loan that leaves a smaller dent in your pocket every month will be the one people choose. Mostly, first-time buyers opt for FHA loans because they don’t have a lot of savings for a conventional loan.

Plus it also depends on the buyers because they need to figure out if this is their transitional house or permanent house.

Downpayment FHA vs. Conventional

Both the conventional and FHA have a very low minimum downpayment rate but you trade off a lot when you go low with the down payment.

The rate for FHA is a minimum of 3.5% down, and conventional starts from 3.0% but it’s better to opt for at least 5% in conventional since you get better options like mortgage insurance and rates.

So, in the case of the FHA loan, the .5 percent extra you pay is a great rate, you get better mortgage insurance and rates than the conventional’s 3.0%.

Health and Safety Standards, FHA vs. Conventional

If you trying to opt for a house that is more a fixer-upper than conventional is the way to go, because FHA is more stringent in the health and safety standards.

Firstly, the appraisers of FHA are licensed and trained and they inspect your house more thoroughly and don’t let things slide, especially things like mold, or lead paint peal from houses that were built before the 70’s because of inhalation issues. Since it can be toxic.

On the other hand, in conventional you can get a pass on a lot, of course not on health hazards but their standards are less strict, maybe you’ll get a pass on a broken railing, floor, light, etc., which is not the case with the FHA loan.

Show less

FHA Loan Appraisal Policy

Aymanejed / Pixabay

Another good thing about the FHA loan is its appraisal policy. Say you did an appraisal for a house but the deal didn’t work out because of issues with the house or some other reason.

So, for a few months, maybe 3-6, I am not so sure, the appraisal will stay with the specific so if another buyer does an appraisal on the same house, then you’ll get a refund from FHA.

Can you Swap between an FHA loan and a Conventional Loan?

ccfb / Pixabay

Swapping loans, especially after the appraisal is not easily possible unless you are an escrow because both have different standards and the buyer needs to be educated beforehand so he can opt for the perfect loan.

For example, if the house is in really good shape and the buyer thinks that it will be approved, then FHA is the way to go, otherwise conventional is your best bet.

Why FHA can hold its own in the Real Estate Market.

iamsushant / Pixabay

FHA is a good loan because it allows you to buy a house even with a lower credit score, in conventional both parties have a higher credit score.

However, in FHA one has a 70-80 credit score and the other can be lower. It doesn’t necessarily mean that people with low credit scores are bad people but it’s more of an ease for low credit scorers to buy a house.

Another feature of the FHA loan is it has a higher debt-to-income ratio, and a good real estate agent in Bakersfield real estate will get you a better house with the FHA loan instead of the conventional one.

The overall current limit of the FHA loan is around 472,030. So, with a 3.5 percent down, you can just about get a 490k house. However, if you pay more down, you can get even a 500k+ house with FHA because of a great limit.

FHA Calculator

As Dan pointed out he has his FHA calculator at homeloansbakersfield.com. In this, you can just add your purchase price and the down payment that you are going to be opting for, maybe 3.5%.

Then you press calculate and you get a generalized outlook of how much your monthly payment will be and that also with purchasing managing index (PMI).

Checking credit scores is now less Invasive.

There are a lot of changes that happened in the real estate market and most lenders are leaning more toward a consumer-friendly approach or rather soft pulls which makes the process a bit easier because credit reports have tripled in price to around 80$ now.

So, now the pre-qualification process is not that intimidating since their credit scores are less likely to be decreased with this approach, unlike in the past when hard pull dragged down the credit scores a lot.

Now, a buyer only needs to file a small application and we can contact them and let them know based on your credit score you can afford this and have this much monthly payment. That’s what a soft pull is.

Show less

Conventional Mortgage Insurance

stevepb / Pixabay

Mortgage insurance in conventional is based on all the factors of the loan, it means if you are putting a downpayment of 10%, your mortgage insurance will be less, and on the other hand if you put down 5%, it will be more.

So, if you have about 20% down you would want to opt for conventional because you’ll have no mortgage insurance at all. However, this is kind of a misconception, you need to shoot for 3% as a first-time home buyer and 5% as a buyer who already owned a home before.

Frequently Asked Questions

Can you have two FHA loans at once?
The simple answer is Yes but under a few circumstances, a buyer can have another FHA loan under special circumstances, for example, a person who is now divorced and owns a home with their spouse but now they are separate so they can again apply for the FHA loan.
Can you buy a duplex, threeplex, or fourplex with FHA?
Yes, you can buy up to a fourplex with your FHA loan but you need to live in one of them.
What are the Minimum Credit Score limits for FHA and Conventional?
For FHA it’s 580 and up but for a better loan 620 and up. On the other hand, the Conventional minimum starts from 620 and up.

If your score is less than 500, you first need to get those issues fixed with credit repair e.g. paying off debts, consistent paychecks, or something like that.

A good lender or realtor can help you with this and can make a plan for you for credit score recovery. Which eventually will land you in a home in Bakersfield real estate.

Conclusion

The Bakersfield real-estate market is easy to get through if you have the right information and guidance. With this article, I covered the differences between, FHA loans and conventional loans.

I tried to list everything that you need to know about both the FHA loan and conventional loan, from downpayment to credit scores, you’ll find everything.

Overall, the FHA loan is bringing along good news for everyone they just want you to have a house even if you are a new buyer. However, the criteria can be strict in some places like an inspection.

On the other hand conventional is leaning more towards veteran buyers. So, I hope, that you found this information, useful, and if you are confused about something, you can contact me.

Comparing FHA vs. Conventional Loans with Dan Ardis – Bakersfield Real Estate

Table of Content