Hello I’m Marcie Billen with Ruya Team Realty in Keller Williams Mulinix here in Norman, Oklahoma. Here, I interview Paul Edwards, a mortgage lender here in Norman, Oklahoma and we have a few questions we want to ask him around what type of loan our buyers should be getting whenever they’re purchasing a house. That’s not a question I can answer, because I’m not a lender; I’m a real estate agent.

Credit Scores

Q: The first question that I have for Paul here is what effect does a credit score have let’s say, on a conventional loan?

A: It’s a great question. Conventional is a lot more sensitive to credit score than say, an FHA. As a lender, what we notice is that credit scores impact interest rates, but also the mortgage insurance cost. That’s where you can see these stark differences. You can see the cost of mortgage insurance on a conventional loan be twice as high sometimes, compared to an FHA, depending on credit score. Lower credit scores are more beneficial with FHA, just based on terms, meaning lower interest rate; cheaper mortgage insurance. Versus conventional loans are more beneficial for a higher credit score because again better interest rate and cheaper mortgage insurance.

Q: What would you say a target credit score is on an FHA then?

Considering minimum down payments, usually when you’re in the 700’s conventional can be stronger versus being into 600. In general, that’s what we find.

Appraisals

Q: Let’s move on to appraisals here. Of course, for every loan that you get from a bank typically there’s going to be an appraisal. Is an appraisal different on a conventional loan versus and FHA loans?

A: Much different. FHA is notoriously stricter on property, and with good reason I mean FHA the spirit behind it is they want a good quality home. Conventional can be a lot more, I’d almost want to say, relaxed at times. Always at the judgment of the appraiser. An FHA example that I like to make on that is like a cracked window, right?  If you’ve got a cracked window pane on FHA, they’re very likely going to want that replaced, whereas conventional, you can sometimes get away with it. Another thing that is kind of more popular with conventional and there’s no guarantee on this, but it can come up; conventional loans sometimes don’t even require an appraisal. Again, there’s no way for us to predict that being available, but it’s only a conventional loan option.

Closing Costs

Q: Paul, as a realtor, one of the first questions that new clients ask whenever they sit down with me for their initial buyer consultation is how much money they should have allocated to purchase a home. How do you help them with that? Do you help them understand how much money they may need for like down payment and closing costs?

A: Absolutely. You know that’s something that comes up quite a bit because it’s something us lenders have to actually document. Some people might think “as long as I’ve got the money, I should be good, right?” From a lending perspective and an underwriting perspective, we do need to know where the money’s coming from, so it’s a very big part of what we do. What we look at, as a lender, in a sense is kind of two numbers – one is what is our down payment amount, and then the other number’s what’s our closing costs amount? When we look at those amounts say, for down payment that’s typically done in a percentage. Minimum down payment on a standard FHA loan is going to be 3.5%.

Conventional is a little different; the standard down payment minimum for a conventional loan is 5%, unless you’re a first-time homebuyer. First-time homebuyer on conventional meeting certain requirements like you have to take a homebuyer education course, then you can do 3%.  So being a first-time homebuyer has a curve on conventional that’s not really there for FHA. The other number closing costs – they’re a combination of a bunch of numbers. Effectively you’ve got your bank charges, you’ve got third-party services you cannot shop, one of which would probably be an appraisal, and then third-party services you can shop for, so your home inspection, your title company, and your termite inspection, then government charges and homeowner’s insurance is always the biggest line-item. Since there are so many things to consider for it’s hard for a lender to always predict exactly what your closing costs are going to be until you identify a specific property.

Most lenders will be kind of conservative in their estimates up front, but there’s something else that you can have happen too, especially when working with a great broker like Marcie, that you might have the ability to negotiate the seller to pay some of your closing costs. But there’s limitations depending on the loan, so the limit lenders have on a conventional; you can only have a seller pay up to 3% of the purchase price for your closing, unless you do about 10%, then it goes up to allow the seller to pay 6%, whereas FHA always 6%.

Q: What does that all mean?

A: What that means is that in general, when doing a minimum down payment, you’re able to ask for more help from the seller with an FHA loan then you are with the conventional. At the end of the day, what’s really important is just start that conversation with a lender – let us help give you these conservative estimates for numbers so that you can plan better and then of course, always listen to your realtor whenever it comes time to make offers so that you can make a realistic offer.

Mortgage Insurance

Q: You talked a little bit about mortgage insurance, or you called it PMI. So, explain what that is.

A: Mortgage insurance is something that’s required to be done. By and large, there are some cases where you won’t have it, and it’s important to understand how these can be different on a conventional loan versus an FHA. In general, conventional loans have the ability to lose that monthly mortgage insurance cost through the life of the loan, the cancellation of mortgage insurance can drop off on a conventional loan. It’s worth mentioning there are times when it has to stay on; like a payment history is not satisfactory or something like that; there are requirements that we’ve got to meet.

FHA is different – FHA you will have monthly mortgage insurance on your loan for the life of the loan, unless with FHA you do at least 10% down. If you do 10% down on FHA, that mortgage insurance it will go away about after 11 years. And again you have to make the payments, right? If payments start to get missed or something like that, you might see the lender want to keep the mortgage insurance on longer. Again, conventional mortgage insurance has a strong chance to go away as long as you’ve got maintenance and whatnot.

Please reach out with any other questions you might have!

Marcie Billen | [email protected] | 918.691.8982