Choosing Conventional Versus FHA Loan
This BLOG On Choosing Conventional Versus FHA Loan Was Written By Gustan Cho
Choosing Between Conventional Versus FHA Loan?
What is the difference between FHA and conventional loans?
FHA Loans are by far the most popular loans today. Here are the basics on FHA Loans:
- FHA Loans are residential mortgage loans that are originated and funded by banks and mortgage companies but guaranteed by the United States Department of Housing and Urban Development, HUD, which is the parent of FHA (the Federal Housing Administration).
- Most FHA Borrowers believe that FHA is a government mortgage lender.
- FHA does not originate, process, underwrite, nor fund FHA Loans.
- The role and purpose of the FHA is to insure private, FHA-approved mortgage lenders when their borrowers default on their FHA Loans.
- In order for FHA to insure these FHA-approved mortgage lenders, the mortgage loan borrowers need to meet FHA Lending Guidelines.
- If the borrowers do not meet any aspect of FHA Guidelines and the lender makes a mistake, FHA will not insure the FHA Loan that they originated, nor can the lender resell the FHA Loan on the secondary market because no institutional investor will purchase a FHA Loan that was not originated and funded correctly.
- This is the main reason why mortgage lenders can be nit-pickers in asking so many questions during the mortgage process.
Choosing Conventional Loans Versus FHA Loan And Mortgage Rates
Mortgage rates on FHA Loans are lower than on conventional loans, even when borrowers only put down 3.5% down payment, because the risk tolerance to lenders is low as a result of the guarantee by FHA.
- Conventional loans are called conforming loans because they need to conform to Fannie Mae and/or Freddie Mac lending guidelines in order for the lender that originates and funds to resell the conventional loan to Fannie and/or Freddie.
- If the lender does not conform to Fannie Mae/Freddie Mac standards, Fannie/Freddie will not purchase the loan.
- Mortgage lenders use their own funds from warehouse lines of credit to originally fund the loan.
- Then, lenders package up all of the loans they fund and resell them to Fannie/Freddie so that they can relieve their warehouse lines of credit and reuse them to originate and fund more loans. In a way, this process is like using your credit card to purchase something and reselling that merchandise for a profit and paying off your credit card balance so you can go and purchase more items and repeat the process all over again.
Case Scenario In Choosing Conventional Versus FHA Loan
- Let’s use some numbers to illustrate this process better.
- To qualify for a 3.5% down payment home purchase FHA Loan, the minimum credit scores required is 580 FICO.
- FHA has much more lenient lending requirements than Fannie Mae’s and Freddie Mac’s conventional loans.
Here is a case scenario on when Choosing Conventional Versus FHA Loan Is Better
A home buyer has a 3.5% minimum down payment for home buyers with at least a 580 FICO credit score.
- With conventional loans, minimum down payment is 3% down for first-time home buyers or 5% down for those who owned a home in the previous 3 years.
- The minimum credit score to qualify for a conventional loan is 620 FICO.
Home buyers with credit scores between 500 FICO and 580 FICO can qualify for FHA loans; however, 10% down payment is required.
Maximum front-end debt-to-income ratio is capped at 46.9% DTI and back-end debt-to-income ratio is capped at 56.9% DTI for borrowers with at least a 620 FICO credit score. Maximum debt-to-income ratios to qualify for conventional loans is capped at 45% DTI. There is no front-end debt to income ratio requirement.
Maximum debt-t0income ratio is capped at 43% DTI for borrowers with credit scores under 620 FICO.
Outstanding collection accounts do not have to be paid.
- You can qualify for a FHA loan without having to pay off outstanding collection accounts and outstanding charge-off accounts.
- Many times, borrowers are told that they do not qualify because their credit scores are not 640 FICO and that they need to pay off all of their outstanding collection accounts and judgments.
- Any mortgage lender can have higher lending standards that surpass the minimum FHA Guidelines and these additional requirements are called mortgage lender overlays.
- You may not qualify with a lender that has higher standards than FHA but you will find FHA lenders with no lender overlays.
- Google “FHA Lenders With No Lender Overlays” to find these. Fannie Mae and/or Freddie Mac have similar guidelines on collection accounts and/or charge-off accounts.
- However, any outstanding account that is past due needs to become current in order to qualify for a conventional loan.
- Conventional loans are somewhat tougher when it comes with outstanding collection accounts than FHA loans because they are not insured by a government entity like FHA, and any home buyer who puts less than 20% down payment will require private mortgage insurance.
- The private mortgage insurance company may require additional requirements in order for them to insure the conventional loan.
Waiting Period After Bankruptcy
There is a two-year waiting period to qualify for a FHA loan after a Chapter 7 bankruptcy.
- With conventional loans, the waiting period is four years after the bankruptcy discharge date.
- You can qualify for a FHA loan one year into a Chapter 13 bankruptcy repayment plan with the approval of your bankruptcy trustee, and there is no waiting period to qualify for a FHA loan after a Chapter 13 bankruptcy discharge date.
- There is a two-year waiting period to qualify for a conventional loan after a Chapter 13 Bankruptcy discharge date.
What is the waiting period to qualify for a mortgage after a short sale vs foreclosure? Choosing Conventional Versus FHA Loan
- You can buy another property sooner with a short sale and/or deed in lieu of foreclosure with a conventional loan. Choosing Conventional Versus FHA Loan
- The waiting period after a deed in lieu and/or short sale is different: 4 years versus 7 years’ waiting period after a foreclosure to qualify for a conventional loan. is a three-year waiting period to qualify for a FHA loan after a foreclosure, a deed in lieu of foreclosure, or short sale.
- There is a seven-year waiting period to qualify for a conventional loan after a foreclosure.
- There is a four-year waiting period to qualify for a conventional loan after a deed in lieu and/or short sale.
- FHA treats foreclosure, deed in lieu, and short sale the same and the waiting periods are all three years to qualify.
- However, Fannie Mae/Freddie Mac have different waiting period requirements after foreclosure, which is seven years, and four years after a deed in lieu of foreclosure and/or short sale.
Mortgage Part Of Bankruptcy On Conventional Loans & Choosing Conventional Versus FHA Loan
If you have a mortgage loan as part of your Chapter 7 bankruptcy, there is a three-year mandatory waiting period from the recorded date of your foreclosure and/or sheriff’s sale even though the mortgage loan balance has been discharged on your Chapter 7 bankruptcy.That is why there is a huge advantage of choosing conventional loan versus FHA loan.
- The three year waiting period clock DOES NOT START until the deed to your property has been transferred out of your name.
- With conventional loans, this waiting period is four years after the discharge date. There are many instances where a mortgage borrower will not qualify for a FHA loan but will qualify for a conventional loan due to this conventional loan guideline on the mortgage part of your Chapter 7 bankruptcy.
For further information on qualifying for a conventional loan if you have a mortgage part of your Chapter 7 Bankruptcy and see if you can qualify for a Conventional Loan with no lender overlays, contact Gustan Cho at The Gustan Cho Team at CrossCountry at CrossCountry Mortgage Inc. NMLS 3029. Gustan Cho NMLS 3029 and The Gustan Cho Team at CrossCountry Mortgage Inc. NMLS 3029 is licensed in 50 states and we have no lender overlays and are available 7 days a week, weekends, holidays to take your mortgage inquiries and make the dream of home ownership become a reality.