Weighing pros and cons of FHA vs. conventional loans

Mortgage broker: Liz Bayer, ProMortgage.

Property type: Two-bedroom condo in San Francisco’s Hunter’s Point neighborhood.

Appraised value: $845,000.

Loan amount: $800,000.

Loan type: FHA 30-year fixed.

Rate: 6.09%.

APR: 7.20%.

Backstory: I have always been a big booster of conventional loans versus FHA loans until now, due to a very recent change that occurred with FHA. FHA just reduced the monthly mortgage insurance by 35%, which now makes FHA a potentially better option than a conventional loan.

In the loan that was just approved, I went over the pros and cons with my client, who was a first time homebuyer with an OK qualifying credit score of 700. He fit the income criteria for the better priced conventional as a first-time homebuyer; however, when I priced the loan, FHA came up as the lower payment opthat tion.

There are two cons of FHA that I discussed with the buyer and his Realtor.

Con number one with FHA is that, with only 5% down, the mortgage insurance never drops off, whereas the mortgage insurance for the conventional loan would drop off in about 10 years, at which point the conventional payment would be lower than the FHA loan.

My borrower preferred to benefit from the lower payment now, since he had no intention of being in this starter home 10 years from now.

Con number two with FHA is the negative perception held by the Realtor community that the appraisal is much harder.

Well, I talked with the Realtor and pointed out that the main difference in the appraisal requirements for an FHA appraisal is actually much better protection for our buyer, because FHA requires the attic and crawl space be inspected. So, I pointed out that she is helping her client to ensure that the crawl space and attic are dry and no other issues exist.

Fortunately, my client’s Realtor was totally interested in protecting her client and actually went and investigated the crawl space and attic prior to the appraisal appointment.

Additionally, the FHA appraisal requires that any peeling paint on a home bulit prior to 1978 be repaired due to the possibility of lead.

Again, the Realtor saw this additional scrutiny as a true benefit to the buyer she represented. And the seller’s Realtor knew that there were no issues that would surface due to these additional steps, so was not reluctant to accept an FHA qualified buyer.

By going FHA, my client’s payment was almost $2,000 lower per year, so it made total sense to choose FHA for his first home.

“FHA just reduced the monthly mortgage insurance by 35%, which now makes FHA a potentially better option than a conventional loan.”