Here are the differences between FHA and conventional loans.
Today I want to talk about the differences between FHA and conventional loans. For one, FHA loans are backed by the Federal Housing Administration, and conventional loans are set up based on the lender and type of mortgage that you choose, meaning they can be more flexible. However, this core difference has a huge impact on the appraisal and inspection process.
For FHA loans, the most important part is the appraisal; the inspection may just be for informational purposes. During the appraisal, they prepare a list of everything that has to be repaired to ensure that the loan is being given properly. That list might include another coat of paint on the side of the house, new shingles, or even a new knob on the oven. No matter what it has, it needs to be fixed for the process to continue.
Another part of FHA appraisals is that they decide what the home should sell for. Let’s say you went under contract with a home at $275,000. The FHA will look at comparable properties and decide what they think the fair market value is. If that’s lower than the contract price, the seller will have to drop the price to move forward.
In conventional loans, you can negotiate ways to deal with that difference, but in an FHA loan, the purchase price has to go down. I’ve been in this situation before as I was helping a client buy a home for the first time. The appraisal came back, but it was $10,000 under what we had agreed to on the contract. The sellers didn’t want to go back on the market because they didn’t think they could get a better price, so they ended up coming down to meet the appraisal.
Whether you’re doing an FHA or conventional loan, you need to take care of the safety and structural issues that the inspection finds. The FHA makes sure of this, but with conventional loans, you can sometimes buy the home as is. I always put a clause in the contract saying that the sellers will fix any major concern, but if you buy a home as is, you might not get the option.
If you’re buying a home as is and the appraisal finds serious issues, you can talk to the sellers, but they may be unwilling to fix anything. At that point, you can decide whether you want to move forward and take care of those issues yourself. If not, you can get your earnest money back.
Overall, conventional loans offer a lot more flexibility, not only in the loan itself but also in their availability. If you have any questions about FHA loans, conventional loans, or real estate in general, feel free to call or email me. I would love to help.