Is an FHA or Conventional Loan Better for my Primary Residence?

Thursday, January 08, 2009

by Ellen Bithell, CRS

Happy New Year! I spent the weekend out at Hollywood Beach for our 1^st Annual Balloonfest, the weather was clear and sunny, although often too windy for our balloon pilots!

This week our guest blogger, Justin Miller, poses another good question, one that I am often asked! FHA versus conventional loans, what is the difference in the Miami Area Real Estate market? Justin explains below!

Ellen Bithell, CRS, CREO, SSS (Short Sale Specialist)

SELLING SOUTH FLORIDA!

Is an FHA or Conventional Loan Better for my Primary Residence?

That is a very good question and the answer is that it depends. FHA is a great loan if you are looking to put the least amount down. FHA requires 3.5% down and the maximum loan amount for Broward, Palm Beach, and Miami-Dade Counties is $345,000 starting January 1st, 2009. The rates on FHA are very good and it has reduced mortgage insurance premiums. The interest rates with FHA are not as credit score driven as conventional loans are. The only draw backs to FHA are that it requires you to keep the mortgage insurance on for a minimum of 5 years AND until you have 22% equity in the property. It also requires an “Upfront Mortgage Insurance Premium” charge of 1.75% of the loan amount. The 1.75% does get financed into the loan but it is a charge nonetheless.

A conventional loan is a great loan if you can afford a higher down payment. It requires at least 10% down in Florida but has a maximum loan amount of $417,000. Interest rates can be a little better on conventional loans than with FHA loans depending on your credit score. The mortgage insurance is a little higher than FHA but not by much. Depending on the mortgage insurance company and/or lender, you are only required to keep it on for 1 year and until you have 20% equity in your home.

If you are looking to purchase a condo with an FHA loan, then the condo project will have to be FHA approved or get what is called a spot approval. A spot approval is a request for the lender to approve just the individual unit you are looking to purchase. Spot approvals are very hard to get because the condo project cannot have a right of first refusal and must have reserves. Most condos have a right of first refusal. With a conventional loan you must put at least 20% down in Florida but the requirements aren’t quite as strict as the FHA spot approval. This can be frustrating to many borrowers looking to purchase a condo but if a lender is not willing to lend on the property it is probably in your best interest to stay away from it anyway. Although the lender is looking out for himself, it ends up protecting you as a borrower too. Some lenders have eliminated financing for condos completely.

If you have at least 10% to put down and credit scores above 720 I would recommend going with a conventional loan. If not, FHA is the choice for you.

Please feel free to call me with any questions or comments.

Thanks