FHA Vs. Conventional Loan: Which One Is Right For You?
Hey, guys, welcome back! So today, we're going to be talking about FHA versus conventional. Whether you're a first-time homebuyer, a real estate agent, or a baby loan officer, this video is going to help you understand why we would choose one or the other, okay? Now, look, there are a lot of misconceptions about both products. A lot of people assume that you can only do FHA if you're putting down less than 20 percent. That is incorrect, so very important if you guys have a pen and a piece of paper – honestly, it doesn't hurt. We're going to be talking about conventional conforming loans, as I filmed this in 2022. That is loans that are under $726,200. Okay, this, we're not talking about LA, we're not talking about Manhattan today. We'll do that another day. We'll do conforming high balance. We're just doing your basic conforming, that's all over the United States except for those super high-cost areas, okay? And we're going to be talking about FHA. That's right, FHA. Do I have a preference? It depends. It depends on what you're trying to accomplish, and it depends on what your individual scenario is. One of these loans is not better all the time than the other, okay?
So, first of all, let's talk about lowest down payment. Most people are going to go FHA if you're a first-time homebuyer. With conventional, you can do three percent down, whereas FHA is three and a half percent down. Now, look, guys, we're talking about the basic programs of both of these. We are not talking about down payment assistance or grants – these are the basic programs, okay? So, FHA, three and a half percent down, conventional, three percent down.
Now, the next thing we hear is, what about credit scores? And look, this can vary based on the lender. Conventional, you see it pretty consistent across the industry – 620 or higher, okay? FHA right now, we are 550 or higher, but lenders vary. So, you'll see some that will only do above 580; you'll see some that are only due above 600. But if your credit score is under 620, you're going there, okay? Unless you're a veteran. If you're a veteran, guys, you should just be watching all my VA videos because that is a different world, and it's magical. Stay away from these two if you're a veteran, okay?
But you're not a veteran, so under 620 credit score, we're going to FHA land. Now, where else do they differ? Debt-to-income, that's right. So, debt-to-income – if you guys aren't familiar with it, after you watch this video, search my channel. I've done multiple videos on it over the years, so just search "debt-to-income," and you'll see a couple come up. With conventional, the max debt-to-income is about 50, okay? And it varies based on your overall credit profile – you know, how much your front-end debt-to-income ratio is. There are factors, but let's just say about 50, okay? FHA is going to let you go up to about 55. So, if you're pushing for a house that's more expensive than what you can do here, you're going to go there. But if your debt-to-income is like 30, 35, 40 percent, I'm generally going here, okay?
So, what else? Two units. Let's say you're a first-time homebuyer, and you're like, "Jen, I want a two-unit property," meaning you're going to live in one unit and you're going to rent out the other. Okay, would I do three percent conventional? No, that's not a product. I would do three and a half percent FHA. Okay, so we're going to go over to FHA if we're doing a two-unit as a first-time homebuyer, and we only want to do three and a half percent down. Now, in reality, you don't even have to be a first-time homebuyer with FHA. Nope. So, I shouldn't have even said first-time homebuyer there. That's one of those misconceptions and myths that we're constantly saying. FHA, you do not have to be a first-time homebuyer. You can own other properties. You can't have other FHA properties without, you know, there's like one exception where you could have another FHA property, but it's rare. But if you have a couple of other houses and you want to use FHA now and you haven't used it, cool, we can do that with FHA. Okay, conventional – as many loans as you want. But look, the three percent is really for first-time homebuyers. After you're not a first-time homebuyer, it's going to flip to five percent down. Okay, so that's another difference. You know, if you're buying your second house and you're like, "Shoot, I only have, you know, three and a half percent. I can't do the five percent," then we're going to end up in FHA land again.
Okay, let's talk about how I handle applications when they come in. And look, lenders handle this differently. So, if you say to a lender, "I just want the lowest payment no matter what," they may just go over here without really talking to you about why. I'm generally going to ignore that you said that, and I'm going to go over here and see if you qualify. And then if you do, we're going to talk about this, and we'll talk about why we're not doing this. Look, here's the deal – are interest rates with FHA lower than conventional? Depends. So, if we're talking about, you know, there's a couple of first-time homebuyer programs right now where if you make under the area median income, conventional has some slamming good rates on those, and those are going to beat FHA. Okay? But not everybody qualifies for those programs because their income may be above the median income, okay? So, are the rates if you're above these special programs so much more than FHA? It's not dramatic, they are higher though, okay? Very important. However, when you are buying a house with FHA, FHA collects an upfront premium of 1.75 percent of the loan amount that gets financed into the loan, okay? So, let's say you're buying a $100,000 house with FHA. You know you're going to be paying 1.75 percent on the loan amount.
Conventional, you're not, okay? So, let's say you have a 760 credit score and you're like, "Jen, I have a 760 credit score, my debt-to-income's 30, I want to buy a single-family home. Which should I do?" I'm going to go over here every time, and the reason is that this doesn't have that upfront cost of 1.75 percent.
People go, "Well, but the rate's lower." Guys, you're financing in 1.75 percent of the loan amount. You're paying for that lower rate. It's not a free magical lower rate.
They're getting their money. They're getting their due. You know, saying that's just a free lower rate, it's just not true because you have that upfront mortgage insurance premium of 1.75 percent that is financed in. Conventional does not have that, okay?
Second thing is mortgage insurance. Now look, you go, "Okay, which one has the cheapest mortgage insurance?" Because you've just told me that sometimes conventional has lower rates, but sometimes FHA has lower rates. And it depends. So, what about mortgage insurance? Is one of them always lower? Nope. I know, guys, sorry. I'm laughing because it's like, I know first-time homebuyers or real estate agents or new loan officers, you guys want definitives. And what I can tell you after, you know, doing this for 15 years, doing hundreds and hundreds of transactions every single year, you really have to look at each individual person's scenario to see what the math is going to look like.
*So, credit scores over 700, generally the mortgage insurance is going to be cheaper with conventional than with FHA. If your credit score is 620 to 700, the mortgage insurance is generally going to be cheaper with FHA. Okay? So, it's going to depend.
Now, what's my general thoughts on how I handle files? So, let's say your file comes into my team. The first thing we're going to do is we're going to structure it. We're going to see where you're at. Now, if your debt-to-income is under 50 percent, we're going to be looking at conventional. Honestly, we look at conventional no matter what. We just bring your debt-to-income down to below 50 percent. So, you know, conventional is going to cap you at that 50.
Honestly, going up to 55 or even above in some circumstances, there's a lot of danger with it. And it's not as much danger to us because, you know, personally, is it going to affect me if you default on your loan? No. Is it good for society? Not really. What I care more about is how's your life going to be, right? When you wake up every morning, how are you going to feel about how much money you have? How are you going to feel when you come home at night? Are you going to come home and be like, 'Hell yeah, I'm home. I'm going to chill. I'm going to watch my Netflix.' Or are you going to be like, 'I got to get a second job. I can't afford this. I canceled Netflix. I've stared at this wall. I don't know what to do. I can't believe I bought this.' Right? It happens, guys. Being house poor is a thing.
Most lenders do not talk to you about your debt-to-income, which to me is just crazy. So, FHA, you can definitely push up into those higher debt-to-incomes. I do not let buyers go into those higher debt-to-incomes without a conversation about it.
You know, if, for instance, there's someone that's giving them money, like let's say they're married, but we can't have their partner on the loan for some reason, you know, going to that higher debt-to-income may make sense. Okay? But beyond that, if it's all on you and you're pushing 55, your life is not going to be fun. It's that simple. Unless there's some sort of income that we're not using, you are going to be house poor. It's really that simple. So, look, in either case, like, do I love pushing up to 50? You know, it's up to you guys what you want to do. I always want to go over payments. So, we start off over in conventional land. The reason that you would end up FHA if you were working with me would be if, you know, I can't get you through conventional because of credit. Sometimes what we'll see is with the lower scores, even though conventional allows for a 620, getting a three percent through with the 620, 640, 660, it may not go through.
That may kick us over to FHA because what's happening is the computer is doing desktop underwriting to assess risk. So if you have some hiccups or some bumps in your credit history, you may not qualify for conventional, even though you have the credit score that's allowable. It doesn't mean the computer is going to like it. So a lot of times the reasons why some of our clients will end up doing FHA is because they have a hiccup in their credit history that's making it so that we can't get that conventional three percent program to work, that simple.
Um, the other one I already talked about: two units. If you're trying to buy a two-unit with the lowest down payment, I'm going to go FHA every single time. Debt to incomes, the third reason. So, you know if your debt-to-income is too high for conventional and you're saying, "Jen, it's the only way I can get a house, I've done a budget, it's going to work," okay, we'll go to FHA. Those are really the only reasons, you know, we would be looking at FHA. If you're a 760 buyer with a 30 debt to income and you're buying a single-family home, there is no reason to do FHA, period. You're going to pay more in mortgage insurance, you're going to pay an upfront funding fee of 1.75 percent, and with FHA, if you're doing the low down payment, it's mortgage insurance for the life of the loan or until you refinance into conventional.
So, you know, a lot of lenders don't talk about this stuff. They just go, "Oh yeah, FHA, let's do it." Sometimes it's just ignorance, sometimes there is a little bit of malice behind it because the bottom line is that in many circumstances, lenders can make more on government loans like FHA, so they may not be very competitive with their conventional rates, but you don't notice it as much on their FHA rates. So if you have a credit score like, seriously, guys, if you're a 760 with a low debt to income and they're pushing you into FHA, I would really be wondering what was going on. And look, I think you should be asking every lender, whether it's my team, myself, "Hey, why am I in this program instead of this program," whether it's conventional or FHA.
I'll have buyers that are like, "Hey, you know, Jen, why am I not doing FHA?" And I'll be like, "Oh, here's three reasons why," and they'll go, "Okay, got it." You know, as a lender, it's not offensive if you ask us why we have structured a loan in one way, that's literally our job is to structure your file and then explain why, defend our position, why did we do this, you know, or maybe you qualify for both and we'll present both options, right? You know, so if you're working with a lender who's getting really offended and they're like, "Whoa, what, you don't think I know how to do my job?" I mean, if someone answered that way, then I would probably say, "Yes, based on your reaction, I'm very concerned about your ability to do your job."
Both of them are good loan programs for different things. You know, if you're trying to buy a house and you know your credit's in the 620 range and there are some hiccups, FHA is a great program. If your credit score is in the sevens, you know, and you have a lower debt-to-income, conventional is a great program. One more thing that you guys need to know about the differences between these two, okay?
So if you're married and you're like, "Jennifer, I do not want my spouse on this loan, I want nothing to do with their BS debt," right? Anyone know anyone like that? Or you have a friend like that, we all do, right? Everyone, someone always has a naughty spouse that's just been out there buying way too much. Anyways, so if you're trying to make sure that that spouse is not taken into consideration, you need to look up right now if you're in a community property State, yes.
So if you're like, you know, the two biggest examples of community property States are Texas and California. So Texas and California, if you're doing a conventional loan and it's just in your name and your spouse isn't on it, I do not care about their debt. They still have to sign off, but I do not care about them, okay, in terms of their debt. Maybe they're a lovely person. FHA, I gotta run their credit and hit you with their debt, yes. So we'll see that a lot, we'll see like where, you know, they want to go FHA because of debt to income because they can't put the spouse on because they have terrible credit and then it's a community property state, so even though they're not on it, still just kills the deal.
So if you have that spouse with so much debt and you're trying to avoid it, FHA is not the right option in a community property State because we have to run their credit even if they're not on the loan and hit you with their debt without giving you the benefit of their income. It is brutal, guys. And if you're like, "Jen, I'm in California and I'm approved for FHA, and they didn't run my spouse's credit," that's because you're working with the bad lender, guys, and they haven't figured that rule out, and they're going to get you underwriting.
So, community property States, FHA Loans, okay, they're going to be running that spouse's credit even if they're not on the loan, yep, yep, conventional, they don't.
So look, I just wanted to do a short video about this just to give you kind of like why we would do one over the other. They're both great loan programs, they just, you want people who are using them the best for your situation, there's no one right answer, it depends on your specific situation and housing goals. So look, as always, I am licensed in 48 states to do mortgages everywhere but Utah and Rhode Island. Anything you guys need, reach out. We have a calendar where you can ask questions. If some of this was confusing, just get on the calendar. Alyssa and Sandy, literally I hired them, guys, just to support you with answering questions. And if you're like, "Oh, but might be stupid," we don't care if it's a stupid question. They're like, the fact that you're reaching out and asking is one step closer to you accomplishing your housing goal. So just get on the calendar, ask them the questions. If you're ready to go, fill out an app. But look, we're here to support you, that's my rationale on FHA versus conventional.
https://www.youtube.com/watch?v=tpwG9sntdGs
These states require equal distribution of assets acquired during a marriage
A contested divorce must rank as one of the modern world's most grueling experiences, but in the U.S., nine states have tried to ease the trauma by passing community property laws. In these so-called community property states, couples are required to split equally all assets acquired during their marriage. Period. The aim is to ease the squabbling over who gets what, and how much of it, by having the law dictate the divide.
The nine states are:
Divorce laws vary by state, with some leaning more toward the community property concept. But these nine states are the only true community property states as of June 2021.1
Three other states—Alaska, South Dakota, and Tennessee—have an "opt-in" community property law that allows such a division of property if both parties agree.2
Registered domestic partners who live in California, Nevada, or Washington are also subject to community property laws.