Major Benefits Of FHA Loans Versus Conventional Loans

Benefits Of FHA Loans Versus Conventional Loans For Home Buyers:

Two of the most popular home loans today are FHA Loans and Conventional Loans. There are many benefits of FHA Loans Versus Conventional Loans for home buyers who had prior credit issues, have prior bankruptcy, have prior foreclosure, have outstanding collection accounts, and those who have higher debt to income ratios and need non-occupant co-borrowers to qualify for a home loan either because they do not have documented income and/or are self employed and have a tough time meeting the self employment mortgage lending guidelines . Even though there are many benefits of FHA Loans versus Conventional Loans, no mortgage loan program, including FHA, cannot qualify mortgage loan applicants who have not shown a responsible payment history, especially the past 12 months, on their debt obligations. HUD and Fannie Mae, both, understand that consumers can go through difficult times due to unemployment, divorce, or medical issues, however, they need to have re-established credit  after periods of bad credit and need to have timely payment history in the past 12 months with no late payments.

List Of Benefits Of FHA Loans Versus Conventional Loans

Major benefits of FHA Loans Versus Conventional Loans is that FHA allows a maximum debt to income ratio of up to 56.9% on the back end debt to income ratios if the mortgage loan borrower has at least a 620 FICO credit score.  FHA mortgage loan borrowers with credit scores of under 620 FICO, the debt to income ratio requirements gets reduced to 43% DTI. The maximum debt to income ratio requirements on conventional loans is 44.99% debt to income ratios.

Another benefit of FHA Loans is that FHA will allow and approve a mortgage loan borrower with little or no income if the main borrower can have a qualified co-borrower to be added to the FHA Loan. The good news with this FHA rule is that more than one non-occupant co-borrower can get added to the main borrower with FHA Loans. Fannie Mae does not allow non-occupant co-borrowers to be added to conventional loans, however, Freddie Mac will allow non-occupant co-borrowers to be added to the mortgage loan borrower. Unfortunately, not too many mortgage lenders are Freddie Mac approved and will only do Fannie Mae Conventional Loans.

Benefits Of FHA Loans Versus Conventional Loans With Low Credit Scores

FHA Loans have lower credit score standards and are more lenient on prior bad credit than Conventional Loan Programs. Minimum credit scores to qualify for 3.5% down payment FHA home purchase loans are 580 FICO credit scores where the minimum credit score requirements for conventional loans are 620 FICO. It is much easier to get and approve/eligible per Automated Underwriting System with FHA Loans than they are with Conventional Loans. FHA is much more flexible with prior bad credit, outstanding unpaid collection accounts, charge offs, late payments, prior bankruptcy, prior foreclosures, and credit tradelines.

Benefits Of FHA Loans Versus Conventional Loans After Bankruptcy And Foreclosure

FHA requires a shorter waiting period after bankruptcy, foreclosure, deed in lieu of foreclosure, and short sale to qualify for a home loan than Fannie Mae and Freddie Mac on conventional loans. Waiting period is 2 years after bankruptcy discharge date to qualify for a FHA Loan where the waiting period after bankruptcy is 4 years to qualify for conventional loan.  FHA requires a mandatory waiting period of three years after the recorded date of a foreclosure and deed in lieu of foreclosure and the date of a short sale to qualify for a FHA insured mortgage loan. Fannie Mae and Freddie Mac require a mandatory 4 year waiting period after the recorded date of a deed in lieu of foreclosure or the date of short sale to qualify for a conventional loan. There is a 7 year waiting period to qualify for a conventional loan after the recorded date of a foreclosure and/or sheriff’s sale.

 

Benefits Of FHA Loans Versus Conventional Loans On Manufactured Homes

Many home buyers prefer to purchase manufactured homes. Many manufactured homes these days are extremely modern with all of the amenities a homeowner can want and many times cost less than a custom built or track home. FHA and VA will finance home loans on manufactured homes that pass a structural engineer’s inspection report. Manufactured homes needs to be permanently attached to a concrete foundation and cannot be mobile. Fannie Mae and Freddie Mac will not allow home financing on manufactured homes.

Benefits Of FHA Loans Versus Conventional Loans On 2 To 4 Unit Homes

Any homes that are between one to four units are classified as residential homes. FHA will allow primary owner occupant home buyers to purchase a 2 to 4 unit property with a 3.5% down payment. However, Conventional Loans require 20% down payment for owner occupants to purchase any two to four unit homes.

Benefits Of FHA Loans Versus Conventional Loans With Mortgage Insurance

Many home buyers do not realize this but a home buyer with credit scores of under 680 FICO credit scores will benefit more with a FHA Loan than a Conventional Loan if they are planning on putting down 3% to 5% down payment on a conventional loan. Conventional Loan programs are extremely sensitive to credit scores and loan to value. Any conventional loans with greater than 80% loan to value will require private mortgage insurance . The cost of private mortgage insurance is not like FHA Mortgage Insurance Premium where the FHA annual mortgage insurance is fixed at 0.85% on FHA 30 year fixed rate mortgage loans. With private mortgage insurance companies, they will determine what the private mortgage insurance will be after the mortgage insurance company reviews the conventional loan borrower’s credit scores, loan to value, and property type. One major advantage of conventional loans versus FHA loans is if the home buyer has excellent credit and has at least 20% down payment to put down on their home purchase where no mortgage insurance is required. However, most home buyers do not realize that the annual private mortgage insurance which is paid by the mortgage loan borrower on a conventional loan with a 5% down payment conventional loan which has been calculated as part of the borrower’s monthly payment is higher than the annual FHA mortgage insurance premium on a FHA Loan for borrowers with credit scores under 680 FICO.  FHA Loans have much lower interest rates than conventional loans. If you were to combine the lower mortgage interest rate with a FHA insured mortgage loan and the lower annual mortgage insurance for under 680 FICO score mortgage loan borrowers, the FHA mortgage loan borrower greatly benefits than the conventional loan mortgage borrower.

Benefits Of FHA Loans Versus Conventional Loans With Sellers Concessions

Sellers Concessions towards a home buyer’s closing costs are what many home buyers get so they can have most or all of their closing costs covered. FHA allows up to 6% of sellers concessions by home sellers to be used for closing costs. Conventional Loans maximum sellers concessions permitted is 3% for owner occupant primary homes and second homes and 2% sellers concessions for investment properties. Home buyers can use sellers concessions to cover all closing costs such as loan origination fees, costs to buy points to buy down mortgage interest rates , title charges, inspection fees, pre-paids ( funds that need to be held in escrow ), homeowners insurance, attorneys fees, and any other third party charges and fees. Sellers concessions cannot be used for down payment and any sellers concessions overage needs to go back to the seller and a kick back from the home seller to the home buyer with sellers concessions overage is not allowed. However, if there are overages in sellers concessions, the mortgage lender can use it to buy down the mortgage interest rates so it does not go back to the home seller.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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