Pros And Cons On 97 LTV Conventional Versus FHA Loans
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.
May 23, 2019 - 4 min read