Why Do Borrowers Need To Move Their Conventional Loan To FHA Loan?
Case scenario: Say you have credit scores of over 740 FICO and no history of bad credit. You had no prior bankruptcies, foreclosures, deed in lieu of foreclosures, or short sale. You have been perfect with paying your bills and have never had a late payment in your life. You have over 5 credit tradelines that are seasoned for over 24 months and a stable job for the past three years. You are a first time home buyer and want to purchase a home via the conventional loan route.
Benefits Of FHA Loans
The above case scenario is a case where the mortgage loan borrower seems like a solid borrower and seems like they can qualify for a conventional mortgage. However, there are cases where a mortgage loan borrower who qualifies for a conventional mortgage need to move their conventional loan to FHA loan program due to many reasons.
Reasons Why Solid Borrowers Need To Move Their Conventional Loan To FHA Loan Program
One of the biggest disadvantage of going with a FHA insured mortgage loan is due to the mortgage insurance premium. FHA mortgage loan borrowers need to pay an upfront 1.75% mortgage insurance premium plus they get charged a 1.35% mortgage insurance premium on the balance of their mortgage loan for the life of the FHA insured mortgage loan. The only way to eliminate the mortgage insurance premium is to pay off the loan either by refinancing it to a conventional mortgage loan program or paying of the FHA insured mortgage loan by selling the home. FHA insured mortgage loan mortgage rates are lower than conventional loan mortgage rates but due to the hefty mortgage insurance premium, the monthly housing expenses are normally higher. Good credit mortgage loan borrowers prefer going with conventional loan programs than FHA loans.
Why FHA Loan?
However, there are cases where the conventional mortgage loan borrower needs to convert their conventional loan to FHA loan program. Here are some examples where a mortgage loan borrower needs to convert the conventional loan to FHA loan program.
1. High debt to income ratios: You can have the best credit in the world but if you have higher debt to income ratios, you will not qualify for a conventional mortgage loan. Conventional mortgage loan programs normally require a 31% front end ratio and 43% back end ratios. If you exceed those debt to income ratio caps, you might have to convert your conventional loan to FHA loan. FHA debt to ratios can max out at 46.9/56.9. 46.9% front end debt to income ratio and 56.9% back end debt to income ratios.
2. Deferred student loans: The Federal Housing Administration allows deferred student loans that have been deferred for 12 or more months not to be counted towards debt to income calculations. However, that is not the case with conventional mortgage loans. With conventional mortgage loans, your future monthly student loan payments are calculated as part of your debt to income calculations. If you cannot get a future monthly student loan payment from your student loan provider, the mortgage lender will calculate 2% of your total student balance amount as your monthly student loan payment. This 2% figure can really sky rocket your debt to income ratio for a conventional loan and if this is the case, you would have to convert your conventional loan to FHA loan.
3. Non-occupant co-borrower: If you need a non-occupant co-borrower because your debt to income ratios are too high, FHA insured mortgage loans is the only way to go. FHA allows non-occupant co-borrowers from family members, relatives, or persons related by law. Conventional loan programs do not.
4. Down payment: If you need 100% gifted funds for your down payment, FHA insured mortgage loans will be your way to go. Conventional mortgage loan programs require that part of the down payment needs to come from you and a portion of it can be gifted. For example, the minimum down payment for a conventional loan is 5% . The mortgage lender will require 3% of the 5% required to come from the borrower and the other 2% to be gifted. FHA allows 100% of the down payment to be gifted.
5. Multi unit properties: If you are purchasing a 2 unit to 4 unit residential multi family unit, conventional mortgage loans require 15% down payment. However, FHA only allows 3.5% down payment on 2 to 4 unit multi family residential properties as long as one of the units is the owner occupant unit.
By Gustan Cho