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good evening.

Wherever you are and whenever

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Today we are going to be talking

about FHA versus conventional

loans.

Why choose one over the other?

What's the best one for each

person I've got here?

Chris Brazell,

director of operations.

What's going on, Chris? Hello.

How are you doing? Good, man,

good.

interested to hear your thoughts

on conventional and FHA.

I feel like we get this

question a lot.

especially with borrowers that

are right on the edge that 700

credit score maybe a little bit

over, a little bit less.

or maybe they're just kind of

looking at different options

for interest rates.

And why is fha just

so much better?

And is that always the

best decision?

Or is the things like the fees

and stuff that come with FHa,

are they enough reason not to go

that route? so let's dive in.

Let's go start with

conventional loans.

Tell me about conventional

loans. Sure.

So in the reason we're talking

conventional versus FHA,

they are the two most popular

mortgage product out there.

That's pretty much, I would say,

what, 90,

95% of all the buyers out there,

they will get one of these

two loans. That's it.

so a conventional loan,

it is probably the most popular

out of the two.

there's pros and cons on all

loan products out there.

So a conventional loan

is a great loan.

It is a very good loan.

it starts off with the fact that

it does have risk based pricing

and what that means.

It's a nice way of saying, hey,

if you have good credit,

you have reserves,

you have some down payment to

put towards the transaction, I.

E.

How we say it in the industry,

skin in the game.

you're going to get the best

pricing out there.

So for that particular client,

a conventional loan,

99 out of 100 times is going to

be the best route for them.

That's it.

so it's going to reward those

people with the good credits.

It's going to give a lower PMI

rate if you don't put 20% down.

So a conventional loan does not

require you to put 20% down,

which is a common misconception,

especially if you're talking to

baby boomers and your parents

and things like that,

where they say you have to put

20% down to get a mortgage,

which is so far and beyond

not the case anymore.

So on conventional loans and

FHA, unless you put 20% down,

you're going to have PMI.

If you have that better

credit score,

let's say stop right there.

Touch on that. Sure.

What are you saying is better

credit? Because in a good,

better best situation,

like if you used to have 460

and now you've got 620,

you've got better credit.

So,

elaborate on what you mean

by better credit.

for a conventional loan,

obviously,

this is not a guarantee for a

lend loan or anything like that,

but just give an idea for

listeners on what you're talking

about. That's a good point.

I'm glad you brought that up.

So, in a conventional loan,

good, better, best,

let's say that is good is going

to be that 680 to 720 range.

Better is going to be that

720 to 740 to 750 range.

And then best is going to be 750

and above. So if you're in that,

you never missed a payment,

you probably have 820 credit,

you're in that best range.

And that's when we're going to

want to talk about conventional

loans. Now,

if you're below that 680 range,

that's kind of like the

line of demarcation,

where we want to start talking

really hard about FHA

versus conventional.

But for conventional,

it's going to be those buckets

of 680 to 7272-7474 and above.

All right? Yes.

And so when you're in that best

range of that 740 and above,

your PMI rate is going to be

rewarded with a lower rate.

So you're going to pay less

monthly in PMI without having

to put that 20% down.

So they're going to give you the

benefit because you are less of

a risk on a conventional loan.

Therefore,

you're getting lower rates,

and you're being rewarded

with that.

So the investor and us

as a mortgage lender,

we're taking on less risk

because you have shown

historically that you will

pay your bills on time.

I think that's the point that

gets lost so many times,

is from a lending perspective,

it is all about risk.

How risky is it that the

investor who's giving 200, 300,

$500,000 on this loan is taking

to recoup the amount

they're giving out?

I think that's so important

because sometimes people,

they say, well, I can afford it,

and I'm paying more in rent.

Now, I understand,

but from what you've shown

the person, not me,

but the investor,

what you've shown the investor

over the past ten years is

you might miss a payment,

you might not pay.

And I think that is just such an

important point to make when

looking at credit and credit

analysis is it is all based on

risk. That's correct, yes.

So it's not the fact that we as

lenders want to penalize people

for maybe not having

impeccable credit.

It's all risk based lending,

and that's what all lending is.

on a conventional loan is that

we look at it from a risk factor

and know, unfortunately,

if you have had those

missed payments,

you're going to pay a little bit

more because that risk factor

has gone up a little bit.

Okay, well,

that is a great segue into FHA,

which has a little bit different

opinions on risk.

go into FHA and really what you

see the pros and the cons for

that program for. Yeah. So fha,

historically,

one of the main reasons the

government came in and said,

we're going to offer this loan

as a government backed product.

And government backed just means

that the government said,

within these loan parameters,

we feel like this is somebody

that deserves a mortgage

and deserves a loan.

That way you don't have to just

be in that upper echelon of that

best credit in order

to get a mortgage.

We as a lot of people do feel

that home ownership is the goal

to prosperity in America and the

way to build your personal

portfolio and make wealth

for yourself

and your kin and things

like that.

So they came in and offered

this fHA loan, said, hey,

we're going to give a loan that

has a little bit more it's

less risk averse.

And what I mean by that is that

they're not going to penalize as

much or give higher rates,

as much or higher PMI rates.

Maybe if your credit scores

are at the 620,

even down as low as 580,

which is as low as we can

go in this program.

And so what it does is not going

to overly penalize these folks

with maybe having a couple of

hiccups on their credit,

having historical

missed payments,

but they're on the

right track now,

and they do want to get into a

home before they have that 700

and 8800 credit scores.

And so with that,

so you don't have to be a

first time home buyer,

which is one of the

misconceptions FHA is offered.

Debt anybody gets really clutch.

if you had some debt you

needed to pay off,

and you only have three and a

half percent after selling your

first or second or third home,

that's a clutch point. Yes.

And then the rates aren't going

to fluctuate nearly as much if

you have that 800 credit

compared to 620 credit.

So you're still going to be

in that same rate bucket.

Maybe a slight 8th or quarter

swing here and there.

But the biggest key too is that

the PMI rate is the same

no matter what.

You could have 800 credit,

you could have 580 credit.

You're going to pay the same

amount in PMI as this person

with 800 as that person at 580

credit is going to pay because

they do not want to make you

spend all your money on PMI just

because your credit

scores are lower,

which is key in this situation.

On why sometimes FHA is a no

brainer over a conventional

loan. Yeah, I mean, really,

depending on where you

are on that scale,

whether you are at five,

8600 or you are at 800,

that same PMI point,

I think is really instrumental

in helping borrowers determine

what program is right for them.

And obviously,

FHA has done a remarkable job at

really helping us to fulfill our

vision of the Sherry Rihanna

team of everyone deserves

a home. Without FHA,

there would be a lot of people

that are not in homes today.

And so we are grateful

for the product.

But it does take some educating

when we talk to a buyer who

does not have to go fha,

who has a better option with

conventional. And yes,

you may see a little bit better

on interest rates. Yes,

you may see a little bit better

relaxing of debt to income

guidelines and things like

that with this program,

however long term,

and really to having that

discussion of what that client's

long term goal is.

Is this a three to five year

home or is this a 20 year home?

Those conversations become

so key in determining the

difference between an FHA and

a conventional. Yeah,

and you made a good point there,

too, Hunter,

is with the more lax debt

to income ratios,

this is a good tool,

an FHA loan is a good tool for

somebody to get into a house

where maybe three to five

years down the road,

after they build some equity,

they're making more money.

then we refinance them into a

conventional loan at that time

to get rid of that PMI.

Maybe rates are a little

better at that point.

And so it's a great tool to get

into a house where maybe for

a conventional loan,

because of the more strict

debt to income ratios,

the more strict criteria on

approvability that you just

can't get a conventional loan on

your current situation here.

So FHA has been utilized years

and years and years,

thousands of times,

to get people in homes that did

not think they could prior.

Yeah. All right,

so last key piece that I feel

like we really get peppered with

questions for an FHA versus

conventional,

is the appraisal aspect of it.

appraisals especially going into

a year where I think we're going

to see a lot more competitive

offer situations

probably a jump in home prices

as well as the reduction

in interest rates.

That just seems like a perfect

storm for appraisal questions

to really come out

of the woodworks.

can you talk a little bit about

what a conventional appraisal

looks like versus what an Fha

appraisal looks like?

And are they drastically

different?

Is one basically including

a home inspection,

or is it really just more

similar? And just,

has FHA just gotten a bad rap?

Yeah.

So it's been a long term

misnomer now that FHA is a

harder loan to do for sellers,

because that appraisal can come

back a lot more strict,

and that's kind of gone

by the wayside.

The gap between a conventional

appraisal and an FHA appraisal

has shrunk tremendously.

So on both know they're going

for value. Of course,

that's the main goal

of an appraisal,

which people forget about.

The reason lenders require an

appraisal is because we're

looking for making sure that we

are lending good value

on a house,

and also for the borrower to

make sure the borrower is buying

the house at good market value.

So with that being said,

we are not requiring the

appraiser to do a

home inspection.

They're not going to be crawling

know,

lifting up slats on boards

and things like that,

and crawling here in every nook

and cranny of the house.

They're not going to be getting

up on the roof.

It's a lot of visual

inspections.

Pass the eye test.

Can you walk around it and

see an issue? If not, we.

Gucci. Yeah,

if there's floorboards missing,

no matter conventional FHA,

it's going to raise a question

with the appraiser,

as simple as that.

If there's significant

water damage,

no matter if it's FHA

conventional,

it's going to raise a question

from the appraiser where

it has to get remedied.

but with an FHA,

they are looking for some health

risk potential issues,

and it's a broad spectrum,

and it's not a cut and

dry aspect of it.

But say you have a crack in a

floorboard that's on a deck

leading up to a house,

the appraiser may just,

you know,

let's replace that board there

they're not going to make you

get a structural engineer report

or anything crazy like that.

An FHA may just ask

one more question.

Whereas a conventional loan,

they don't care a lot about

cosmetics and things like that.

It's mainly just conventional

loan.

They're looking for that value

to make sure that it is there

based on the sales price of the

house and the marketability

of the home, where FHA,

their main objective,

is still looking for the value

and the marketability

of the home.

But they may look at a little

thing here and there.

If they walk in the house and

visually, something is just off,

and that's the big key there.

If the house looks great and

everything looks good,

they are not going to go poking

and prodding through everything

to look for an issue where

1520 years ago,

that was a little bit

more of the case,

but that has definitely

gone by the wayside.

And most of our appraisers

actually,

which the good thing about us

here at the share Rihanna team,

being a local lender

and everything,

is we have our pool of

preferred appraisers.

Most of them are FHA and

conventional appraisers for

exactly that reason.

That's one point I

wanted to make,

is the appraisers doing

conventional are generally the

same appraisers doing the FHA.

It's the same opinion of value

because it's the same person

providing the opinion.

Va is really the outlier there

where you have this separate

pool of almost mystery

appraisers.

And are your appraisers,

va approved or not?

And they kind of come in and

they do their thing.

It's a little bit more clouded

on who it is and when we're

going to get it delivered,

where with FHA and conventional,

it's generally the same

people doing it.

they're just writing the report

a little bit differently,

including a few more of the

nuances that FHA may require.

And I think that is so important

to remember because I think

a lot of people are know,

just like with a VA appraiser,

is it going to come, in short,

do we really know this person,

how they have an opinion of

value? well, with FHA,

we don't have to worry about

that because it's the same

person doing the conventional.

Yep, I agree.

And now it's time for market.

In a minute.

This is where we give you an

update on the conditions of

the market each week,

no matter the topic of the show.

So you're always getting current

information each week.

This week,

we did have an unexpected report

from the Federal Reserve that

cautioned that inflation could

fluctuate unpredictably

throughout the year.

and what that can do is that can

result in a slower than desired

decrease in rates from the Fed.

If there's a concern that

inflation could go back up,

they may not be as tempted to

drop rates as they once were.

I do think that this is just

a little bit of reactionary

reading from December,

where we saw inflation go up

from 3.1 in November to 3.4.

But it's also not considering

that December is a high

shopping month.

there's going to be a higher

rate of temporary employment

happening.

It's a hard month to gauge

a year off of.

I think that's really what

we're dealing here with.

I think as we go into January's

readings and February's

readings,

we continue to see a decline

month over month.

We're going to see the Fed begin

to really talk about dropping

those rates again,

significantly. Of course,

every time they did talk about

it at a fed level,

you're going to see rates react.

So we want to make sure we're

monitoring our rates,

watching the ten year bond.

We don't want to lock

clients in too soon.

We also don't want to lock

them in too late.

this has been a mortgage

mindset,

a mortgage matchmaker series.

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