This guide covers the pros and cons of 97 LTV conventional versus FHA loans. Down payment is the biggest negative factor for first-time home buyers. Saving money these days with the high cost of housing, food, gas, insurance, and raising a family. It makes it difficult for a family to save money for a home purchase. Many hard-working families can easily afford homes.
Most middle-class working Americans 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. The minimum down payment required for FHA loans on a home purchase is 3.5%. Conventional loans require a 5% down payment.
Reducing Eligibility Requirements To Promote Home Ownership
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 loosened with FHA loan programs. Fannie Mae and Freddie Mac revived the 3% down payment home purchase program to compete with FHA and promote homeownership for first-time homebuyers.
The low down payment requirements will make a renter think twice about renewing their lease on a rental. This should make any renter consider home ownership. Why rent when I can buy?
HUD’s minimum down payment requirement is 3.5% on a home purchase. Fannie Mae and Freddie Mac’s down payment requirement was 5%. However, Fannie Mae and Freddie Mac re-launched the 3% down payment conventional loan program to compete with FHA, also called the 97 LTV Conventional loan. The following paragraphs will cover the benefits of 97 LTV conventional versus FHA loans.
Benefits of 97 LTV Conventional Versus FHA Loans
There are many benefits to 97 LTV Conventional versus FHA loans. For home buyers limited with the down payment for a home purchase, the 97 LTV Conventional Versus FHA loans are better due to the 3.0% down payment requirement versus the 3.5% FHA loans. However, the home buyer needs to qualify for conventional guidelines.
Conventional loans have tougher eligibility requirements than FHA loans. The minimum credit score to qualify for a conventional loan is 620 versus 580 required for a 3.5% down payment FHA loan. The waiting period after bankruptcy for an FHA loan is two 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.
Eligibility Requirements on 97 LTV Conventional Versus FHA Loans
For 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%. The FHA loan program will be better for home buyers with lower credit scores, higher debt-to-income ratios, and credit issues. 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 premiums. One of the main benefits of 97 LTV Conventional versus FHA loans is no upfront mortgage insurance. HUD requires upfront mortgage insurance, which is 1.75% of the loan balance normally added to the loan balance.
HUD recently lowered the annual mortgage insurance premium to 0.55% on FHA loans from 0.85%. Depending on the borrower’s credit scores, the FHA annual mortgage insurance premium is often lower than private mortgage insurance on conventional loans.
HUD also has a lifetime FHA annual mortgage insurance premium of 0.55% on 30-year fixed-rate FHA loans that cannot be canceled. There is no upfront mortgage insurance premium for conventional loans. Private mortgage insurance is required for borrowers with higher than 80% loan to value. Private mortgage insurance can be canceled with conventional loans, and 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. Borrowers must go with FHA versus conventional loans due to high-balance student loans. HUD has a higher debt-to-income ratio cap versus conventional loans. Doctors, lawyers, and educators often have federal student loan debt that is over six figures.
The maximum debt-to-income ratio on FHA loans is 46.9% front-end and 56.9% back-end. Fannie Mae and Freddie Mac does not have a front-end debt-to-income ratio cap. The maximum debt-to-income ratio on conventional loans is 50% DTI.
HUD, Fannie Mae, and Freddie Mac require 0.50% of student loan balances to count as hypothetical monthly debt. 0.50% of $200,000 is $1,000 per month and automatically may disqualify borrowers’ FHA, and Conventional Loans allow Income-Based Repayment (IBR) that reports to credit bureaus to be used as monthly debt. If the monthly debt does not report to credit bureaus, the lender can do a rapid rescore and credit supplement and report it to bureaus in 3 to 5 days. Borrowers with higher student loan balances may need to go FHA versus conventional loans.
Mortgage Included In Chapter 7 Bankruptcy
Another major benefit of 97 LTV Conventional versus FHA loans is borrowers with prior mortgages included in Chapter 7 Bankruptcy. Sometimes, borrowers must go with 97 LTV Conventional Versus FHA loans due to waiting period requirements. Conventional Guidelines state if borrowers had a mortgage included in Chapter 7 Bankruptcy, there is a four-year waiting period from the discharge date of Chapter 7. The foreclosure, deed-in-lieu, or short sale date can be after discharge 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 the Chapter 7 discharge date.