Comparison Of 97% LTV Conventional Loan Versus FHA Loan
Down payment is the biggest negative factors for first time home buyers. Saving money these days with the high cost of housing, food, gas, insurance, and raising a family makes it rather difficult for a family to save money for a home purchase. Many hard working families who can easily afford homes just do not have the down payment and closing costs required for a home purchase. FHA and Fannie Mae/Freddie Mac’s mission is to promote homeownership so they are both competing by promiting homeownership by offering low down payment home purchase programs. Besides VA loan programs and USDA loan programs, all residential mortgage loan programs require down payments and all real estate transactions come with closing costs. Minimum down payment required for FHA loans on a home purchase is 3.5%. Conventional loans required 5% down payment, however, both Fannie Mae and Freddie Mac revived the 3% down payment home purchase program to compete with FHA and to promote homeownership for first time home buyers. The low down payment requirements will make a renter think twice in renewing their lease on a rental and should make any renter consider homeownership. Why rent when I can buy?
Reducing Eligibility Requirements To Promote Home Ownership
Both HUD, Fannie Mae, Freddie Mac, VA, and USDA want to promote home ownership. Since late 2013, mortgage lending guidelines on all mortgage loan programs have lightened up. Credit score requirements and credit guidelines have really loosened with FHA loan programs. HUD also launched the FHA Back to Work Extenuating Circumstances due to an economic event mortgage loan program to shorten the waiting period from the standard two years after a bankruptcy discharge date and three years after the recorded date of a foreclosure to a one year waiting period. FHA minimum down payment requirement is 3.5% on a home purchase and Fannie Mae and Freddie Mac’s down payment requirement was 5%, however, to compete with FHA, both Fannie Mae and Freddie Mac re-launched the 3% down payment conventional loan program, which is also referred to as the CONVENTIONAL 97.
97% LTV Conventional Loan Versus FHA Loan
For home buyers who are limited with down payment for a home purchase, the 97% LTV Conventional Loan is better due to the 3.0% down payment requirement versus the 3.5% down payment requirement for FHA loans. However, the home buyer needs to qualify for the conventional loan requirements. Conventional loans have tougher eligibility requirements than FHA loans. Minimum credit scores to qualify for a conventional loan is 620 FICO versus the 580 FICO credit scores required for a 3.5% down payment FHA loan program. Waiting period after bankruptcy for FHA loan is 2 years from the discharge date versus a 4 year waiting period for a conventional loan. There is a three year waiting period to qualify for a FHA loan after a deed in lieu of foreclosure and short sale versus a four year waiting for a conventional loan. There is a three year waiting period to qualify for a FHA loan after the recorded date of a foreclosure versus a seven year waiting period after a standard foreclosure for a conventional loan. Those home buyers with good credit and higher credit scores and no prior bankruptcy, foreclosure, deed in lieu of foreclosure, short sale,and lower debt to income ratios, the 97% LTV Conventional Loan program will be the better choice. Maximum debt to income ratio requirements for conventional loans are capped at 45%. For home buyers with lower credit scores, higher debt to income ratios, and credit issues, the FHA loan program will be a better choice since they may not qualify for a conventional loan. Maximum debt to income ratio caps on FHA loans is capped at 56.9%.
Mortgage insurance is mandatory for FHA Loans. FHA requires an upfront mortgage insurance which is 1.75% of the mortgage loan balance and there is a lifetime FHA annual mortgage insurance premium of 0.85% on a 30 year fixed rate FHA mortgage loan. There is no upfront mortgage insurance premium for conventional loans, however, borrowers with higher than 80% loan to value, private mortgage insurance is required. However, private mortgage insurance can be canceled with conventional loans as well as the homeowner has 20% or more equity.
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