Pros And Cons On 97 LTV Conventional Versus FHA Loans

Gustan Cho Associates are mortgage brokers licensed in 48 states

This Article Is About Pros And Cons On 97 LTV Conventional Versus FHA Loans

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
They just do not have the down payment and closing costs required for a home purchase
FHA, VA, USDA, and Fannie Mae/Freddie Mac’s mission is to promote home ownership
Mortgage agencies are competing by promoting home ownership by offering low down payment home purchase programs
Besides VA loan programs and USDA loan programs, all residential loan programs require down payments
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 home ownership for first time home buyers
The low down payment requirements will make a renter think twice in renewing their lease on a rental
Should make any renter consider home ownership
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, lending guidelines on all loan programs have lightened up
Credit score requirements and credit guidelines have really loosened with FHA loan programs
FHA minimum down payment requirement is 3.5% on a home purchase
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 97 LTV Conventional Loan

Benefits Of 97 LTV Conventional Versus FHA Loans

There are many benefits on 97 LTV Conventional Versus FHA Loans. For home buyers who are limited with the down payment for a home purchase, the 97 LTV Conventional Versus FHA Loans is better due to the 3.0% down payment requirement versus the 3.5% for FHA loans.

However, the home buyer needs to qualify for conventional guidelines
Conventional loans have tougher eligibility requirements than FHA loans
Minimum credit scores to qualify for a conventional loan is 620 versus 580 required for 3.5% down payment FHA loans
The waiting period after bankruptcy for FHA loan is 2 years Chapter 7 discharge date
4 year waiting period for a conventional loan
There is a three-year waiting period to qualify for an FHA loan after a deed in lieu of foreclosure and short sale versus a four year waiting for conventional loans
There is a three-year waiting period to qualify for an FHA loan after the recorded date of foreclosure versus a seven-year waiting period after a standard foreclosure for conventional loans
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 50%
For home buyers with lower credit scores, higher debt to income ratios, and credit issues, the FHA loan program will be a better choice
Maximum debt to income ratio caps on FHA loans is capped at 46.9% front end and 56.9% back end to get an approve/eligible per automated underwriting system

Mortgage Insurance On 97 LTV Conventional Versus FHA Loans

Mortgage insurance is mandatory for FHA Loans.

HUD requires two types of mortgage insurance premium
One of the main benefits on 97 LTV Conventional Versus FHA Loans is there is no upfront mortgage insurance
FHA requires an upfront mortgage insurance which is 1.75% of the loan balance that is normally added to the loan balance
FHA also has a lifetime FHA annual mortgage insurance premium of 0.85% on a 30 year fixed rate FHA Loans that cannot be canceled
There is no upfront mortgage insurance premium for conventional loans
Borrowers with higher than 80% loan to value, private mortgage insurance are required
Private mortgage insurance can be canceled with conventional loans as well as the homeowner has 20% or more equity

Income Based Repayment On Student Loans

Student Loan debt is one of the biggest barriers mortgage borrowers face.

Their borrowers need to go with conventional versus FHA Loans due to high balance student loans
Doctors, lawyers, and educators often have federal student loan debt that is over six figures
HUD requires 1% of student loan balances to count as a hypothetical monthly debt
1% of $200,000 is $2,000 per month and automatically may disqualify borrowers
Conventional Loans allows Income-Based Repayment (IBR) that reports to credit bureaus to be used as monthly debt
If the monthly debt does not report on credit bureaus, the lender can do a rapid rescore and credit supplement and report it on bureaus in 3 to 5 days

Borrowers with higher student loan balances may need to go conventional versus FHA Loans.

Mortgage Included In Chapter 7 Bankruptcy

One other major benefit with 97 LTV Conventional Versus FHA Loans is borrowers with prior mortgage included in Chapter 7 Bankruptcy. There are times where borrowers need to go with 97 LTV Conventional Versus FHA Loans due to waiting period requirements. Conventional Guidelines state if borrowers had mortgage included in Chapter 7 Bankruptcy, there is a four year waiting period from the discharged date of Chapter 7. The foreclosure, deed in lieu, short sale date can be after the discharged date and does not matter. The housing event needs to be finalized. Borrowers cannot reaffirm the mortgage after the discharge of the 13. With FHA Loans, there is a three year wait period to qualify for FHA Loans from the recorded date of the housing event after Chapter 7 discharged date.