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Financing Your Real Estate. Conventional vs. FHA

If you don’t know that the credit markets have dried up, you may be living in a cave which you cannot finance anyway.  Most of you that know about today’s crazy lending industry know, or at least hear that mortgages are tough to obtain.  Higher qualifying standards stand in the way of a lot of homebuyers, which is one of the reason congress is pushing for new loan types.  I feel a lot of people are misled and even scared to even ask for an application out of fear that they will be rejected for the loan.

Here are some pointers on how to finance your real estate:

1.  Conventional Financing:  This type of financing has been historically the most popular.  Over the last couple of years.  Since FHA loans are being touted as more affordable loans, conventional loans are losing the popularity contest at the moment although still a great product for qualifying buyers.  Requirements of a conventional loan applicant include excellent credit, employment stability with sufficient income, sizeable down payments (today roughly 20%), and a low debt to income ratio.  Borrowers who qualify are awarded an interest rate just a tiny bit lower than FHA financing.

2.  FHA Financing:  FHA was created by the federal government to provide affordable home loans.  FHA insures the loan, mitigating the lender’s risk.  Borrowers must provide proof of sufficient income to show ability to pay the mortgage.  FHA qualifying guidelines are definately more relaxed than conventional financing.  Using conventional financing you cannot have a bankruptcy within the last 7 years.  Applying for FHA, the bankruptcy must be only 2 years or more discharged.  Conventional financing typically wants to see open and seasoned credit lines on your credit report such as payment histories of credit cards and autos.  FHA allows alternative credit accounts.  FHA will acknowledge utilities, cable TV, auto and/or health insurance, child care, school tuition, furniture or appliance store account.  Higher Debt to Income ratios tend to be accepted more favorably than conventional financing.  The nice thing is that FHA interest rates are highly competetive with conventional rates. 

Required down payments for FHA financing is only 3%.  Using a 3% down payment as opposed to a 20% down payment in most conventional financing is why FHA loans have become more attractive in today’s market.  On conventional loans, there really is no loan limit.  Using FHA financing there is a limit.  For most of New Jersey real estate, the maximum loan allowed under FHA guidelines is $625,500 in high cost areas, which cover most of northern New Jersey. 

I have received a ton of e-mails saying that they are afraid that loan limits will hold them back from buying.  In 99% of those cases, many are referring to the old Fannie Mae and Freddie Mac loan limits that were nearly half that a little over a year ago.  Times have changed.  We are in a deep recession and the housing market is a gigantic part of the problem.  In recognizing this, Congress has allowed federally insured loan limits to dramatically increase, making home buying easier and more affordable. 

Look at it this way to compare the two.  Take a home purchase of $500,000.  Using conventional financing, let’s assume a 20% down payment equivelent to $100,000.  Your remaining principal of $400,000 will give you a monthly mortgage payment of $2,180 using today’s 30 year fixed rate quote of 5.13%.

Using the same $500,000 purchase price, FHA financing requires a 3% down payment as mentioned equivelent to $15,000.  Your remaining principal balance of $485,000 leaves you with a monthly mortgage payment of $2,907 using 6% as an FHA rate.  Keep in mind, when financing using FHA product, it is important to understand that you will be required to purchase a Private Mortgage Insurance (PMI) policy which is typically equivelent to 3% of the loan amount.  This amount is a tax write-off and you are entitled to any unused portion if/when you refinance into conventional financing. 

The payment difference is $727.  To justify either option, ask yourself first if you have enough for the sizeable down payment for conventional financing and have set it aside for a home purchase.  Secondly, you must understand that real estate can go up and down in value.  Would you feel more secure down paying the mortgage, or would you feel more comfortable with the higher payment and more cash in your bank account.  It’s a tough decision but one that only you can answer.  Either option is a great one, and from the time I write this to the time you read this I will bet all the money in my pocket that rates will be lower when you read this.

The time is certainly now to buy real estate with such advantageous financing product.  Contact us if you would like to consult with our financing expert with Apple Mortgage Corp.  New Jersey Real Estate is our specialty.

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