Benefits Of FHA Loan Versus Conventional Loan Comparison

Benefits Of FHA Loan Versus Conventional Loan Comparison 

This BLOG On Benefits Of FHA Loan Versus Conventional Loan Comparison Was UPDATED On June 27th, 2018

Benefits Of FHA Loan Versus Conventional Loan Programs:

Two of the most popular mortgage loans are FHA Loans and Conventional Loans.

  • VA Loans and USDA Loans are excellent mortgage loan products
  • Not everyone can qualify for VA Loans and USDA Loans
  • VA Loans require mortgage loan applicants who are veterans of the United States military with a valid Certificate of Eligibility in order to qualify with the 100% financing VA Loan program
  • USDA requires that the subject property be in a USDA approved area
  • Borrowers on USDA Loans need to meet certain maximum income requirements
  • FHA Loans are for everyone who qualify and so are conventional loans
  • Both FHA Loan and Conventional Loan programs have their own unique lending guidelines

We will compare FHA Loan versus Conventional Loan programs on this blog

Credit Score Benefits Of FHA Loan Versus Conventional Loan

Minimum credit scores required for a 3.5% down payment FHA Loan is 580.  Minimum credit scores required for a 3% down payment conventional loan is 620 credit scores.

  • Minimum down payment requirements for a FHA Loan is 3.5% down payment on a home purchase
  • Minimum of 580 credit score is required for 3.5% down payment home purchase FHA Loans
  • Borrowers with credit score of under 580, then the minimum down payment is 10% down payment on a home purchase
  • There is a minimum down payment of 3% down payment for first time home buyers on conventional loans
  • Definition of first time home buyers is someone who did not own a property in the past three years to qualify for a conventional mortgage loan
  • For seasoned and veteran home buyers, the minimum down payment on a conventional loan is 5% down payment on a home purchase

Mortgage Insurance Benefits Of FHA Loan Versus Conventional Loan

FHA requires a one time upfront mortgage insurance premium:

  • Besides the one time FHA UPMIP, there is a lifetime annual mortgage insurance premium of 0.85% for the life of a 30 year fixed rate FHA loan no matter what the loan to value is
  • Conventional Loans, there is no private mortgage insurance required if the homeowner has at least a 20% down payment or 80% loan to value
  • Any conventional loans with a loan to value of 80% or greater, private mortgage insurance is required
  • But the private mortgage insurance is substantially less than the FHA mortgage insurance premium for higher credit score borrowers
  • However, for lower credit score borrowers, private mortgage insurance on conventional loans may be substantially higher than FHA MIP
  • Conventional mortgage lenders will allow homeowners to cancel the private mortgage insurance once loan to value reaches the 80% loan to value mark

Waiting Period After Bankruptcy And Foreclosure Benefits Of FHA Loan Versus Conventional Loan

FHA waiting period after bankruptcy is two year waiting period after the discharge date of Chapter bankruptcy.

  • FHA Loan waiting period to qualify for a FHA Loan after a foreclosure or deed in lieu of foreclosure is three years from the recorded date of the deed which is reflected on the recorder of deeds office
  • There is a mandatory 3 year waiting period from the date of a short sale in order to qualify for a FHA loan
  • FHA Back to Work Extenuating Circumstances due to an Economic Event which shortened the waiting period to a one year waiting period after bankruptcy and/or housing event is no longer in effect
  • The following is called a housing event:
    • foreclosure
    • deed in lieu of foreclosure
    • short sale is no longer in effect

With conventional loans:

  • There is a four year waiting period after the discharge date of Chapter bankruptcy to qualify for a conventional loan
  • There is a four year waiting period to qualify for conforming loans after Chapter 13 Bankruptcy dismissal date
  • The waiting period is two years after Chapter 13 discharged date
  • There is a four year waiting period after a deed in lieu of foreclosure or short sale to qualify for a conventional loan
  • There is a seven year waiting period after foreclosure to qualify for a conventional loan

FHA Versus Conforming Guidelines With Mortgage Part Of Bankruptcy

Borrowers who had a mortgage part of bankruptcy, the waiting periods are very different with FHA versus Conventional Loans.

  • If mortgage was part of Chapter 7 bankruptcy, the waiting period to qualify for FHA Loan starts from the recorded date of foreclosure after the bankruptcy discharge date
  • This holds true even though mortgage loan balance was discharged in bankruptcy
  • With conventional loans, if mortgage was included in bankruptcy, the waiting period to qualify for a conventional mortgage starts from the date of the bankruptcy discharge date
  • So if someone had a mortgage included in Chapter 7 bankruptcy and the deed of home did not get recorded two years after the discharge date, the waiting period will be four years from the discharge date of bankruptcy
  • Housing event date does not matter

Agency Versus Fannie Mae Guidelines On Deferred Student Loans

With the exemption of VA Loans, FHA, USDA and Conventional Loans no longer allows monthly student loan payments that are deferred at least 12 or more months to be exempt from the calculations of debt to income ratios.

  • VA loans does not allow this exemption and will not count monthly student loan payments in calculating debt to income ratios even if the student loan is deferred for longer than 12 months
  • If student loans are not deferred and borrower does not know what the monthly payments are, Department of Veterans Affairs requires the following:
    • Take 5.0% of the outstanding student loan balance
    • Divide that figure by 12 months
    • The resulting number will be the hypothetical monthly student loan payment used in DTI Calculations
  • Borrowers who cannot get an exact monthly payment from student loan provider, 1% of outstanding student loan balance will be used as hypothetical monthly student loan payment
  • This figure will be used in calculating monthly student loan payments

However, the second option on how FHA accepts student loan payments is the following:

  • Contact the student loan provider and use the following verbiage:
    • I am applying for a mortgage
    • My lender needs a hypothetical monthly payment that is fully amortized over an extended term
    • This term is normally 25 years
    • This figure normally turns out to be 0.50%
    • This figure needs to be in writing which takes two to five business days to get
  • Mortgage underwriters can use this figure in lieu of the 1.0% of the student loan balance

Conventional Loans does accept Income Based Repayment (IBR) on federal student loans as long as it reports to all three credit bureaus. If it does not report, we can do a rapid rescore and credit supplement which normally takes three to five business days.

FHA Versus Conforming Guidelines On Non-Occupant Co-Borrowers And Gift Funds

FHA allows a non-occupant co-borrower to be added on loan to qualify for income.

FHA will permit for borrowers to add non-occupant co-borrowers on 3.5% down payment home purchase loans if the following can be met:

  • Non-Occupant Co-Borrowers needs to be related to main borrower by blood, marriage, or law such as the following:
    • Parents and step-parent
    • Grandparents and step grandparents
    • Brothers and sisters
    • Step brothers and sisters
    • In-Laws
    • Children and grandchildren
    • Step children and grandchildren
  • If non-occupant co-borrowers are not related to main borrowers by law, marriage, blood, then 25% down payment is required

Fannie Mae and Freddie Mac allow non-occupant co-borrowers but they do not have to have any relations to main borrowers. VA and USDA only allows co-borrowers to be added however they need to be married to main borrowers.

FHA allows 100% gifted funds to be used for down payment on a home purchase. Other loan programs also allows for gifted funds.

FHA Versus Conventional Loans On Debt to Income Ratios

Maximum debt to income ratio caps on conventional loans are capped at 50%.  Benefits Of FHA Loan Versus Conventional Loan is it allows higher debt to income ratios. FHA has front end DTI cap at 46.9% and maximum back end debt to income ratio cap at 56.9% to get an approve/eligible per AUS.  For home buyers who have great credit but higher debt to income ratios, FHA may be the route to take on a home purchase loan. VA does not require a minimum credit score and does not have a debt to income ratio cap. USDA requires a 29% front end and 41% back end debt to income ratio cap.

Home Buyers who need to qualify for mortgage with a direct lender with no mortgage overlays, please contact us at Gustan Cho Associates at 262-716-8151 or text us for faster response. We have zero overlays on government and conventional loans.

This BLOG On Benefits Of FHA Loan Versus Conventional Loan was updated on June 27th, 2018

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