Should I go Conventional or FHA?

[Marshall F. Graham]

Should I Go Conventional or FHA?

By: Marshall F. Graham
Aulds Horne and White
www.auldshorneandwhite.com
marshall.graham@auldshornewhite.com
(318) 869-4444

01/07/2010

2009 represented a changing time within the real estate industry, as our understanding of what signified an ideal client for conventional loans changed dramatically. Credit scores that were at one time praised are now considered to be meager at best. 2009 brought about a change within our political arenas in regards to whether home ownership was a privilege or a basic fundamental right, as it was deemed to be over the last 10 years. Federal Housing Administration (FHA) loans by definition were designed to help those individuals achieve home ownership, whom for whatever reason could not go conventional. FHA in its creation was never meant to compete with its brethren Fannie Mae, but existed independently to aide middle to low income families in their pursuit of “the American dream”. The underlying changes of regulation within Fannie Mae has shaken the industry down to its basic core of understanding, leaving most clients asking, “should I go conventional or should I go FHA”?

One of the biggest changes that 2009 brought was the introduction of Risk Based Pricing. Traditionally, as long as a client met the minimum requirements across the board, they would receive “the” conventional rate of the day in relation to the desired term they seek. Conventional interest rates are now more challenging to compute, since they are based not only on where a client’s credit score falls within a complex tiered matrix, but as well as a client’s Loan To Value (LTV), or in other words, how much money they are borrowing in regards to the appraised value of the property. It is important to note that Risk Based Pricing only affects mortgages with terms greater than 15years. Also, the credit score used to calculate the rate is the lower median score of the two borrowers. FHA, however, has not “yet” introduced Risk Based Pricing in their system. Therefore, FHA absorbs many clients, who traditionally would be considered conventional loan candidates, since the clients often can receive a ½% better rate by going FHA and avoiding Risk Based Pricing all together.

FHA’s volume has increased significantly due to the increase of conventional loan minimum credit score requirements. Much of the change to the minimum conventional credit score requirements was due to the Principle Mortgage Insurance (PMI) companies eliminating coverage for credit scores sub 680. By default, since PMI is required on all conventional mortgages where a client puts less than 20% down, borrowers with credit scores of <680 must either go FHA or put at least 20% down. With 680 now being the “minimum” credit score allowed, they represent the highest adjustments to conventional interest rates. FHA in turn, raised its minimum credit scores from 580 to 620. A borrower can no longer purchase a property if his or her credit score is