1. Conventional loan. Conventional loans, the most popular type of mortgage, come in two flavors: conforming and non-conforming. Conforming loans: A conforming loan “conforms” to a set of Federal Housing Finance Agency (FHFA) standards, including guidelines around credit, debt and loan size.
Sellers are wary of FHA loans because they believe their property will have to pass a level of scrutiny that conventional loans don't. FHA indeed has minimum property requirements (MPRs) that don't apply to other loans.
Do sellers prefer conventional over VA loans? VA loans can take longer to close than a conventional loan because the underwriting process is longer. Some sellers may not be willing to wait the extra time it takes for a VA loan to close.
An FHA loan may be a better option if you have a lower credit score, a higher DTI ratio, or less money saved for a down payment. On the other hand, a conventional loan may work better if your finances are sound and you can qualify for favorable loan terms.
Sellers often prefer conventional mortgages because they usually offer lower interest rates and the qualification requirements can be more lenient than those of an FHA loan. Additionally, with conventional loans, sellers may not have to pay private mortgage insurance or other upfront costs associated with an FHA loan.
FHA Loan: Cons
Here are some FHA home loan disadvantages: An extra cost – an upfront mortgage insurance premium (MIP) of 2.25% of the loan's value. The MIP must either be paid in cash when you get the loan or rolled into the life of the loan. Home price qualifying maximums are set by FHA.
At times, sellers might shy away from VA loans, worried about the appraisal process. They fear VA appraisals are far stricter than conventional loans, potentially undervaluing their home or demanding costly repairs before closing.
These loans are perfect for borrowers with a strong credit history and the funds for a more substantial down payment. Conventional loans offer the ability to avoid the costs of mortgage insurance while also giving borrowers the option of fixed or adjustable rates.
Conventional loans don't have any upfront costs like the funding fee. However, Conventional loans often require monthly payments for private mortgage insurance (PMI). The total cost of these PMI payments over the life of your loan can be higher than the cost of your funding fee.
Unfortunately, sellers often perceive the FHA loan approval process as risky because of the FHA's relatively lenient financial requirements and stricter appraisal and property standards.
Conventional loans cons:
Lenders typically uphold stricter eligibility criteria and may require a higher minimum credit score than those offering government loans. While some conventional loans can be secured with as little as 3% down, some lenders may require you to make a down payment of at least 20%.
The minimum down payment requirement for a conventional loan is 3% of the loan amount. However, lenders may require borrowers with high DTI ratios or low credit scores to make a larger down payment. Even if it's not required, if you're able to make a higher down payment, you may want to consider doing so.
Most borrowers choose fixed-rate mortgages. Your monthly payments are more likely to be stable with a fixed-rate loan, so you might prefer this option if you value certainty about your loan costs over the long term.
A balloon mortgage is a home loan with an initial period of low or interest-only payments. The borrower pays off the balance in full at the end of the term. A balloon mortgage is usually short-term, often five to seven years.
Conditional Commitment
Most commitment letters offer conditional approval, which means the lender agrees to fund the mortgage as long as certain conditions are met within a certain time frame.
The Takeaway. If you're looking to buy a home, FHA loans with low down payments may be an attractive option to consider. To qualify for an FHA-insured loan, you need a minimum credit score of 580 for a loan with a 3.5% down payment, and a minimum score of 500 with 10% down.
One of the primary reasons some sellers may hesitate to accept a VA loan is due to misconceptions about the program. Some sellers believe that VA loans involve more red tape, delays, or stricter inspection requirements compared to conventional loans.
May have less equity in your home
One potential drawback of a VA loan is that it may result in less equity in your home. With the advantage of being able to buy a home with little or no money down, you won't need an initial out-of-pocket payment.
Veteran buyers can always negotiate the payment of closing costs with sellers. Sellers can pay all loan-related costs and up to 4% in concessions, which can cover prepaid items and more. In some cases, buyers may be able to utilize a lender credit to cover some or all of their closing costs.
Common reasons for FHA loan denial include low credit scores, high debt-to-income ratios, insufficient income, insufficient funds for a down payment, and properties not meeting FHA guidelines.
Since your home must meet FHA property minimums, the appraisal process may include more requirements than a conventional home loan. The appraisal is required to be performed by an FHA approved appraiser and may have additional inspections which could result in a higher appraisal cost.
While conventional loans allow you to make a slightly smaller down payment of 3%, you must have a credit score of at least 620 to qualify. When you're deciding between a conventional loan versus an FHA loan, it's important to consider the cost of mortgage insurance.