Conventional Loan Versus FHA Loan

Conventional loan programs have tigher mortgage lending requirements and guidelines compared to FHA loan mortgage programs.  To qualify for a 3.5% down payment FHA loan, the mortgage applicant only needs a 580 FICO credit score whereas to qualify for a 5% minimum down payment conventional loan, the mortgage loan applicant needs a minimum of a 620 FICO credit score.  Many folks believe that FHA loan programs are just for those with prior bad credit or low incomes.  There are many times where a mortgage loan applicant with great credit and income turn for FHA loan programs instead of conventional loan programs.  For example, multi-family  homes up to 4 units are considered residential homes and multi-unit mortgage loan applicants can qualify for residential mortgage loans.  FHA allows 3.5% minimum down payments for multi-family units up to 4 units.  However, with conventional loans, a 5% down payment is required for a single family home, owner occupant units  for homes up to 2 units, 15% down payment is required for owner occupant units, and for 3 to 4 residential units, a 25% down payment is required for owner occupant units.

FHA Loan: 2014 FHA Loan Guidelines

Changes have been implemented in 2014 for FHA loans.  Here are the basic 2014 FHA mortgage lending guidelines:

1.  Maximum loan amount has been dropped from $410,000 to $271,000 unless it is a high cost county area or multi-family units.  This creates a problem for those who are seeking to purchase a higher priced home because the maximum FHA loan amount is $271,000.  Those who need to purchase a larger higher priced home need to go the conventional loan route.

2.  3.5% down payment with a minimum of 580 FICO credit score.  10% down payment is required for those mortgage loan applicant with credit scores between 530 FICO and 580 FICO.  Non-occupant co-borrowers are permitted to be added on the FHA loan for those that cannot qualify with their own income.  Maximum debt to income ratios for those under 620 FICO credit scores is 43% DTI.  Maximum debt to income ratio permitted for those mortgage loan applicants with over a 620 FICO score is 56.9% DTI.

4.  Collections:  New collections rules have been implemented by FHA in 2014.  Collections with open credit balances, 5% of the balance will be used towards the mortgage loan borrower’s debt to income ratios.  For example, if a mortgage loan borrower has a $2,000 unpaid collection from years ago, 5% of the unpaid $2,000 balance, or $100, will be used towards the calculation of the debt to income ratios.  Prior to this new rule, unsatisfied open balances on collection accounts were not calculated in debt to income ratio calculations.  However, if you enter into a payment agreement with the collection agency, then the new monthly payment agreement will be used towards the calculation of the debt to income ratios.  Medical collections are exempt.

5.  Credit disputes:  Credit disputes applies to both FHA loans and Conventional loans.  You cannot have any credit disputes with open credit balances ( certain rules applies ) in general.  For example, if you have a derogatory credit item that is five years old with a $5,000 balance, you cannot try to delete that item by disputing it to the credit bureaus stating it is not your in hopes of the creditor not responding back and hoping in getting that derogatory credit item removed.  If it is an active pending dispute, your mortgage application process will come to an immediate halt and before it can proceed again, you need to retract the credit dispute.  Unfortunately, once you retract the credit dispute, your credit scores will most likely drop.  Medical credit disputes with open credit balances are exempt from this rule.

6.  Waiting period after bankruptcy, foreclosure, deed in lieu of foreclosure, short sale:  2 year waiting period after discharge date of bankruptcy; 3 year waiting period after recorded date of foreclosure and/or deed in lieu of foreclosure; 2 year waiting period after the short sale date reflected on the sale’s HUD’s settlement statement.

7.  FHA Back to Work Extenuating Circumstances due to an economic event:  Back in August 15, 2013 which waives the two year waiting period after a bankruptcy and three years after a foreclosure, deed in lieu of foreclosure, short sale.  FHA Back to Work Extenuating Circumstances due to an economic event mortgage programs now makes the dream of homeownership possible to those with a prior bankruptcy and foreclosure after a one year waiting period after the bankruptcy, foreclosure, deed in lieu of foreclosure, short sale to those who qualify.  The Back to Work mortgage program is not for everyone.  To qualify, the mortgage loan applicant needed to have good credit prior to their loss of job.  The loss of job needed to be the reason why they filed bankruptcy or went through a foreclosure.  The mortgage loan applicant needed to have been unemployed or underemployed for at least six months and had to have had at least a 20% reduction on his or her household income.  After the economic event, the mortgage loan applicant needs to have re-established his or her credit and have not had a single late payment.  Rental verification is required in most cases unless they can explain why they cannot provide rental verification.  A HUD approved housing counseling certificate is required and the mortgage loan borrower cannot officially apply for the FHA Back to Work mortgage loan until 30 days have elapsed after the completion of the housing counseling certificate.

FHA Mortgage Insurance Premium

One of the major disadvantages of FHA loans is due to the hefty mortgage insurance premium.  FHA charges a one time upfront 1.75% mortgage insurance premium and a lifetime 1.35% annual mortgage insurance premium on the balance of the mortgage loan.  The only way to cancel the FHA mortgage insurance premium is to pay off the FHA mortgage loan by refinancing it through a conventional mortgage loan program or selling the house and paying off the FHA loan.

Conventional Loan

Conventional loan programs require a minimum credit score of 620 FICO.  However, 620 credit score is considered pretty bad credit with conventional mortgage lenders and those with the 620 credit score will most likely get penalized with high mortgage rates.  To get the best possible conventional mortgage rates, a conventional mortgage loan borrower should have credit scores over 740 FICO.  Unlike FHA loans, where anyone with a credit score of 640 FICO or higher get the same interest rate, conventional loans are different.  For the top conventional mortgage rate, your credit scores need to be at 760 FICO or higher.  Then there are mortgage rate adjustments every 20 points.  Rates get higher at 740, 720, 700, 680, 660, 640, 620.  The lower your bracket, the higher the rate.  Here are the basics on conventional loans:

Conventional Loan Requirements

1.  Minimum credit scores is 620 FICO.

2.  Down payment requirements:  5% for single family homes, condos, townhomes; 10% down payment for second/vacation homes; 15% down payment for 2 unit multi family homes; 25% down payment for 3 to 4 unit multi family homes.

3.  Waiting period:  Waiting period after a bankruptcy, foreclosure, deed in lieu of foreclosure, short sale is much tougher for conventional loans.  Normally, conventional mortgage lenders do not want to approval someone for a conventional loan until 7 years after a bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale.  However, there are a few mortgage lender with no lender overlays that will approve a conventional loan two years after a short sale and/or deed in lieu of foreclosure if the mortgage loan applicant has a 20% down payment for his or her home purchase.  10% down payment conventional loan programs are allowed after four years after a deed in lieu of foreclosure and/or short sale.  Regular foreclosures is a mandatory 7 year waiting period.

Cases Where Conventional Loan Is The Only Option

There are cases where a conventional loan versus FHA loan is the only option.  For home buyers wanting to purchase a condominium home and the condominium complex is not FHA approved, you can only purchase the subject condominium with a conventional loan.  Other cases where you need to go with a conventional loan versus FHA loan is when you want to purchase a second home.  FHA only allows primary owner occupant units to be financed and second home financing is not allowed under FHA mortgage lending guidelines.

Gustan Cho

www.gustancho.com

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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