As a real estate agent, you are the first point of contact a client makes when considering the purchase of a home. For this reason, it's important to have some basic knowledge of mortgage products for making a strong first impression as to the breadth of your industry knowledge. Of course everyone has their specialization, and maintaining a strong working partnership with a reputable lender will ensure your clients are well educated on the financing of their home purchase, it is also important to have some basic fundamental knowledge for strengthening your sales presentation.

With that in mind, let us tackle some of the more common questions we've found clients have for their real estate agents with regards to considering FHA or Conventional loans – the down-payment, credit score and gift funds requirements, as well as the difference between FHA's Mortgage Insurance Premium (MIP) and Private Mortgage Insurance (PMI) on conventional loans.

When it comes to down-payment, both programs offer very aggressive options for empowering your clients to achieve their American Dream. The FHA program offers homebuyers a standard low down-payment option of 3.5%. With conventional loans, the home-buyer has a unique opportunity to qualify for a loan with as little as 3% down.

The majority of the time these two options allow a current renter to tangibly see that the same dollars they have spent on renting their current home could be better used on a property they could call their own.

So, with down-payment options being very similar, what truly differentiates the monthly payment schedule of these two programs?

First, qualifying factors. FHA loans are supported by the Department of Housing and Urban Development and seek to empower first-time and cash-constrained buyers to enjoy the fruits of homeownership. In doing so, they allow for lower qualifying credit scores compared to conventional loans. With FHA the lowest qualifying score is a 580, while the lowest qualifying score for a conventional loan is 620.

When it comes to the source of funds for down payment, the FHA programs are much more lenient in their requirements and allow for 100% of the down-payment to be sourced as a gift. Conventional loans on the other hand are more restrictive, and depending on property type and loan-to-value ratio, the majority of funds typically must come from the homebuyer.

For the above reasons FHA loans are considered riskier than conventional loans, which is reflected through the differences in mortgage insurance. FHA loans require what is known as a Mortgage Insurance Premium, and in the case of home purchases where the borrower puts down less than 10%, this form of insurance is required for the life of the loan. In the case of conventional loans, Private Mortgage Insurance is required on all loans with less than 20% down payment, however the cost is cheaper than FHA's Mortgage Insurance Premium and falls off the loan when the loan-to-value ratio of the property drops to 78%.

So as a brief recap:

1. Both Conventional and FHA loans offer programs with low down payment options varying from 3%-5% depending on property type and use.
2. FHA loans are more flexible with credit scores and gift funds, as the minimum qualifying score is as low as 580 and 100% of the down payment can be sourced as a gift. Conventional loans on the other hand require a minimum credit score of 620 and have a number of restrictions on the source of the cash used for down-payment.   
3. Mortgage insurance is more expensive with FHA loans and depending on the down-payment, will remain for the life of the loan. Conventional loans allow for less expensive mortgage insurance, depending on the borrowers credit profile, and are removed from the loan when the loan-to-value ratio hits 78%.

We're glad some of our listeners reached out to us to request this topic, and it is our hope that today's episode has provided you with the information you need for being able to enhance your sales presentation and serve as a resource to your clients. This is also why we provide a written copy of every episode's transcript – so you can take the information with you and have it readily available for when you need it!

Of course, we are here for you as well. If you have any questions about mortgage products or are looking to determine what the best scenario might be for a client actively searching for a home, please give me a call directly at 561-864-2458.   

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I appreciate you joining me today, hopefully you can find a way to apply your shot into today, until tomorrow, have a better day today than yesterday.

The views of this blog, "Your Morning Shot" podcast, and on this site in general are solely those of the authors, Matt Weaver (NMLS-175651) and Zack Lewis, and do not express the views or opinions of Finance of America Mortgage.