First Time Home buyer Conventional loan vs FHA

[Mohamed Farih]

Hello everyone!

I am God willing a future first time home buyer in the process of trying to land my first home. I was planning on getting an FHA loan for my mortgage. My realtor's lender told me I am eligible for the FHA loan. I asked the realtor if I am eligible to get a conventional loan that only requires 3% down or 5 % down for first time home buyers. I believe the name is conventional 97. He said I am only able to get a conventional loan if I put 20% down. So I believed him and forgot about trying to get a conventional loan.

Then I went shopping around at quicken loans to see if I would be able to receive a lower interest rate for an FHA loan. While doing the pre-approval process the agent at Quicken loans told me I am eligible for a conventional loan for 3% down for a first time home buyer. That threw me off because I thought he was approving me for an FHA loan but it was actually a conventional loan. I then asked if I was to get a conventional loan with them am I still eligible for an FHA in the future. The agent replied yes that is true.

I am now confused and don't know who to believe.  Hopefully I can get some insight from you guys.  My questions are below:

1. Why did my lender not let me know about the conventional loan vs Quicken loans telling me I can get a conventional loan for less down? Do lenders not like giving that loan out for whatever reason?
2. Is it true that I can get a conventional loan by only putting only 3% down?
3. What is the difference between the conventional and FHA?
4. Also, is it true that if I get the conventional loan I would still be eligible for the FHA loan? Has anyone tried that method in financing their investments? Use a conventional and then an FHA later on?
5. Is there a risk with going with those big major mortgage companies like Quicken loans vs my own realtors lender? Will my realtor not be able to work with me if I use the big major mortgage company?

Thank you in advance for all your help.  I greatly appreciate it!

[Andrew Postell]

@Mohamed Farih ugggg, so frustrating that this occured.  Very sorry.  This is actually very common.  Now, the real test here is that a good lender can answer your questions below....admittedly, not every lender can.  It takes several years to understand how all of this plays out but I can answer these questions and then ask these SAME questions to the lender you want to use...and see how they do

1. Why did my lender not let me know about the conventional loan vs Quicken loans telling me I can get a conventional loan for less down? Do lenders not like giving that loan out for whatever reason? - the first lender you went to may not even have access to that loan. It sounds strange but not every lender has access to every loan. Most lenders need money from other banks (we call these wholesale lines of credit) to fund their loans upfront. Once they are funded they then sell the loans to Fannie/Freddie/VA/FHA/etc. So if that bank's wholesale line of credit doesn't extend far enough for them to purchase all the loan types....then they just don't have access to them! Now, your front line person that you spoke to probably has NO idea about this. He/She is probably trained to say certain things so don't hold this against that person. They are probably guiding you exactly how they are trained. But this is the PRECISE reason why you should shop around. Glad you actually did it.
2. Is it true that I can get a conventional loan by only putting only 3% down? - Yes, this is 100% true.  There are 3 different types.  Fannie Mae has a specific 3% down loan if you are a first time homebuyer.  Fannie and Freddie both have a 3% down loan if you qualify because of income or because the area you are moving to is in a specific census tract.  Those 2 do not require you to be a first time homebuyer.  The first time homebuyer 3% down loan is just a standard Fannie Mae loan.  The other two are called HomeReady and HomePossible respectively.  OH!  and there is another type that allows you to put your downpayment in the form of "sweat equity"...meaning, you can just work on the home as your downpayment.  That one is called HomeOne.  ALSO, there are many, many different types of "Down Payment Assistance" (DAP) programs.  DAPs are programs that give you, essentially, free money to buy a house.  The drawback is you usually pay a higher rate but they are out there.  Normally, you would need to work with a bank located in your state to get access to those loans but they certainly do exist.
3. What is the difference between the conventional and FHA? - There are several differences here. In general, a conventional loan will have lower fees than a FHA loan. In general, conventional loans will have lower PMI if you have good credit over an FHA loan. FHA loan's PMI will last FOREVER if you put down the minimum downpayment. Conventional loan PMI goes away at 78% LTV...but you can request it to be removed at 80% LTV. FHA loans do allow more flexibility with your credit score and how much you can afford. FHA loans do have a loan limit in each county.
4. Also, is it true that if I get the conventional loan I would still be eligible for the FHA loan? Has anyone tried that method in financing their investments? Use a conventional and then an FHA later on? - Yes, this is 100% true. You can use either loan as many times as you like if you pay them off each time. There are some restrictions once you start keeping multiple loans but the answer to your exact question is yes, you will still be eligible for an FHA loan if you get conventional first.
5. Is there a risk with going with those big major mortgage companies like Quicken loans vs my own realtors lender? Will my realtor not be able to work with me if I use the big major mortgage company? - You can use WHOMEVER you want as a lender.  Generally, people like to see you working with a smaller bank over a larger bank though.  Smaller banks can make closing on time.  Large banks have a big problem with that.  You might be ok but it might be worth shopping with one other bank to see how you feel about them. Remember, you are the customer.  The lender should be earning YOUR business.  Work with who you feel comfortable with.

Hope this helps!