Buying A House With A Conventional Loan

Buying A House With A Conventional Loan Versus FHA Loans

Gustan Cho Associates are mortgage brokers licensed in 48 states

This BLOG On Buying A House With A Conventional Loan Versus FHA Loans Was UPDATED And PUBLISHED On April 6th, 2020 In this blog, we will discuss and cover buying a house with a FHA loan versus a conventional mortgage. There are many advantages of buying a house with a FHA loan versus any other loan program. This holds especially true for borrowers with bad credit, lower credit scores, high debt to income ratio, and late payments. There are many benefits with buying a house with an FHA loan. Many home buyers often have many questions about mortgage loan programs once they make up their mind to become homebuyers. Two of the most popular mortgage loan programs available to homebuyers, especially first-time home buyers, are FHA and Conventional loans. Buying A House With A FHA loan is more advantageous versus Conventional loan because FHA loans have much more lenient credit and debt to income ratio requirements. HUD, the parent of FHA, requires a minimum credit score of 580 credit score for homebuyers. Conventional loans require a minimum of 620 FICO credit scores for home buyers. In this blog, we will discuss Buying A House With A FHA Loan Versus Conventional Mortgage.

FHA Versus Conventional Loans

HUD, the United States Department of Housing and Urban Development, is the parent of the Federal Housing Administration or FHA. HUD sets the Mortgage Guidelines for all FHA loans. Fannie Mae and Freddie Mac are the two mortgage giants in the United States that set the mortgage lending standards for Conventional loans. Conventional Loans are also called Conforming loans. This is because they need to Conform to Fannie Mae and/or Freddie Mac conventional mortgage lending guidelines

Buying a house with a FHA loan is highly recommended for home buyers who had prior credit issues such as the following:

  • prior bankruptcy
  • foreclosure
  • deed in lieu of foreclosure
  • short sale
  • collection accounts
  • tax liens
  • charge off accounts
  • late payment history
  • higher debt to income ratios
  • late payments after bankruptcy, foreclosure, deed in lieu of foreclosure, short sale

FHA is way more lenient with borrowers with less than perfect credit, high debt to income ratios, and gaps in employment.

Buying A House With A Conventional Loan

Two of the most popular mortgage loan programs today in the United States are FHA Loans and Conventional Loans.

  • HUD which is the United States Department of Housing and Urban Development is the parent of the Federal Housing Administration which is known by many as FHA
  • FHA is a government agency and is not a mortgage lender
  • FHA’s mission and purpose is not to originate or fund FHA insured mortgage loans
  • Its purpose is to insure mortgage loans that are originated and funded by approved banks and lenders
  • FHA insures lenders in the event borrowers defaults on their FHA Loans
  • In order for HUD to insure FHA Loans, lenders need to be HUD approved and each mortgage loan needs to meet FHA Guidelines
  • FHA Guidelines is listed on HUD 4000.1 FHA Handbook
  • HUD 4000.1 Handbook is over 800 pages of rules and regulations on FHA mortgage lending guidelines
  • HUD Guidelines change and the changes is updated by HUD through mortgagee letters as changes comes up
  • FHA will not insure FHA Loans where lenders did not follow HUD Guidelines

In this article, we will discuss and cover Buying A House With A Conventional Loan Versus FHA Loans.

Buying A House With A FHA Loan With Prior Bad Credit

HUD understands that borrowers may have had prior bad credit due to unemployment, loss of business, medical reasons, divorce, or other extenuating circumstances. Many people will experience the flow of their income get interrupted where it affected them not to be able to make their monthly debt payments on time where it affected their credit. FHA does not require borrowers to pay off outstanding unpaid collection accounts with balances and/or charge off accounts. Borrowers can still qualify for an FHA loan without having to pay off any outstanding collection accounts.

Home Buyers Buying A House With A Conventional Loan Due To Guidelines

FHA Loans are not available for second home financing and investment home financing.

  • FHA Loans are only for owner occupant primary home financing only
  • Conventional Loans allows for second home financing and investment property financing
  • In general, FHA loans have less stringent mortgage lending requirements than Conventional Loans
  • HUD requires a minimum of 580 FICO credit scores versus 620 FICO credit scores required for Conventional Loans
  • Maximum debt to income ratios permitted with FHA Loans is 56.9% DTI versus 50% DTI with Conventional Loans
  • There is a two year waiting period to qualify for an FHA Loan after a Chapter 7 Bankruptcy discharged date with an FHA Loan versus a four year waiting period with Conventional Loans
  • There is a three-year waiting period to qualify for FHA Loan after a foreclosure, deed in lieu of foreclosure, and short sale
  • There is a four year waiting period after a short sale and/or deed in lieu of foreclosure to qualify for a Conventional Loan
  • There is a seven-year waiting period to qualify for a Conventional Loan after a foreclosure

If you have a Chapter 13 Bankruptcy discharge, there is no waiting period after a Chapter 13 Bankruptcy discharged date to qualify for an FHA Loan.  Borrowers can qualify one year into their Chapter 13 Bankruptcy with FHA Mortgages. There is a two-year mandatory waiting period to qualify for a Conventional Loan after a Chapter 13 Bankruptcy discharged date and four-year waiting period after Chapter 13 dismissal date.

Home Buyers Buying A House With A Conventional Loan Due To Mortgage Part Of Bankruptcy

Home Buyers who had a mortgage or multiple mortgages as part of their Chapter 7 Bankruptcy can now qualify for a Conventional Loan four years from the discharged date of their Chapter 7 Bankruptcy discharged date:

  • This holds true even though the foreclosure that was part of their Chapter 7 Bankruptcy was recorded at a later date
  • As long as their foreclosure has been finalized after the Chapter 7 Bankruptcy discharged date, the waiting period is four years from the date of the Chapter 7 Bankruptcy discharged date
  • Borrowers cannot have reaffirmed the mortgage after bankruptcy

This is not the case with FHA Loans.

Buying A House With A FHA Loan With Outstanding Collections And Late Payments

HUD does understand Borrowers that went through financial hard times and have bad credit and lower credit scores as well as outstanding unpaid collection accounts as well as charged off accounts. However, having prior bad credit and outstanding unpaid collection accounts and charge-off accounts in the past is different than having recent bad credit and recent late payments. HUD wants to see that all borrowers have been timely with all of their monthly debt payments in the past 12 months. HUD really frowns upon the fact if Borrowers has had late payments after a bankruptcy, foreclosure, deed in lieu of foreclosure, and short sale.

Buying A House With A FHA Loan: Bankruptcy And Foreclosure

Home buyers who had a prior bankruptcy and/or foreclosure can become eligible to purchase a home with an FHA Loan two years after a bankruptcy:

  • The waiting period is three years after a foreclosure, deed in lieu of foreclosure, or short sale with re-established credit to qualify for FHA Loans
  • Again, minimum credit scores to qualify for an FHA Loan after bankruptcy and foreclosure is 580 credit scores
  • 3.5% down payment is required
  • Lenders do not want to see any late payments after bankruptcy, foreclosure, deed in lieu of foreclosure, and short sale
  • Re-established credit is required
  • Lenders want to see timely payments in the past 12 months

Buying A House With A FHA Loan: FHA Loan After Chapter 13 Bankruptcy

There is no waiting period to qualify for an FHA loan after a Chapter 13 Bankruptcy discharge date. However, if the Chapter 13 Bankruptcy discharge has not been discharged for at least 2 years, then all FHA loans after a Chapter 13 Bankruptcy discharge are all manual underwriting. All manual underwriting FHA loans require verification of rent. Verification of rent is only valid if the renter can provide 12 months of timely canceled checks and/or 12 months of timely online bank statements payments to the landlord

Bankruptcy And Foreclosure Mortgage Guidelines

What are the bankruptcy and exclusion guidelines With FHA Loans, if you had a mortgage or mortgages as included in Chapter 7 Bankruptcy, the following guidelines apply:

  • There is a three year waiting period from the recorded date of the foreclosure and/or date of the sheriff’s sale of the property that the mortgage note was included in the Chapter 7 Bankruptcy
  • Many mortgage lenders are in no major hurry to change the deed out of the borrowers’ name into their name
  • Many folks who had a mortgage or mortgages as part of their Chapter 7 Bankruptcy are left in a situation where their waiting periods did not even start yet
  • This is because the deed has not transferred out of their names yet
  • This new Fannie Mae Guidelines On Mortgage Part Of Bankruptcy opens up many doors for homebuyers who had a mortgage part of their bankruptcy but the foreclosure was not recorded at a much later date

Homebuyers looking for a Conventional Mortgage Lender who has no lender overlays, please contact us at 800-900-8569 or text us for faster response. Or email us at gcho@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays to take your calls and answer any questions you may have.

Home Buyers Buying A House With A Conventional Loan Due To Mortgage Rates

Mortgage Rates on Conventional Loans are generally higher than mortgage interest rates on government loans.

  • Government Loans such as FHA Loans,  VA Loans, USDA Loans are backed and insured by the government entity against the default of borrowers
  • Fannie Mae and Freddie Mac does not guarantee Conventional Loans against borrowers defaulting on Conventional Loans
  • All Conventional Loans that have higher than 80% loan to value are required to have private mortgage insurance
  • Private mortgage insurance is what guarantees the mortgage lender in the event if  borrower defaults on their mortgages
  • Borrowers who put a down payment of at least 20% down payment, there is no private mortgage insurance required on conforming loans
  • Mortgage Rates on Conventional Loans depends on the borrower’s credit scores and the amount of down payment the home buyer puts down on their home purchase

To get the best Conventional Mortgage Interest Rates, borrowers should have at least a 740 FICO credit score and have a 20% down payment. Prior bad credit or a prior bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale has no bearing or impact on a borrower’s mortgage rates.

Getting Started With Buying A House With A FHA Loan

Buying A House With A FHA loan is very simple. A loan officer will go over the credit report, credit scores, credit payment history, your two years tax returns, two years W2s, most recent paycheck stubs, bank statements, and will run the mortgage loan application to the Automated Underwriting System for automated approval. Gustan Cho Associates is a mortgage company licensed in multiple states with no lender overlays on FHA loans. With being a no overlay lender, as you have an automated approval per Automated Underwriting System and you can meet all the conditions, you should have no problem in closing on your FHA home loan on time. If you are in need of a pre-approval, please contact our Team at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com.

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