Qualifying With Conventional Loans Versus FHA Loans
This BLOG On Conventional Loans Versus FHA Loans Was Written By Gustan Cho NMLS 873293
There are major differences in qualifying with Conventional Loans Versus FHA Loans and we will point out the benefits and negatives of Conventional Loans Versus FHA Loans on this article.
- Conventional loans are credit sensitive as well as loan to value sensitive.
- The higher your credit scores, the lower your mortgage rates.
- The lower your loan to value ratios are, the lower your mortgage rates are.
- Mortgage loan borrowers can qualify for a 3.5% down payment FHA insured mortgage loan with a credit score as low as 580 FICO.
- However, the minimum credit score required for conventional loans are 620 FICO.
- With a score of 620 FICO, the likelihood of the conventional mortgage loan borrower paying a higher interest rate is extremely likely.
- To get the best interest rates on conventional loans, the borrower needs a credit score of over 740 FICO.
- There are credt score threshold where higher rates apply.
- For example, a conventional loan borrower may get a interest rate of 4.5% if their credit scores are over 740 FICO.
- If their credit scores fall to 720 FICO, the interest rate might be 4.625%.
- If their credit scores are at 700 FICO, interest rates might be at 4.75%.
- There will be a big interest hike for conventional mortgage loan borrowers with credit scores below 700 FICO.
Loan To Value Comparison On Conventional Loans Versus FHA Loans
The minimum down payment required for conventional loans for single family residential homes is 3.0% down payment for first time home buyers and 5% for home buyers who has owned a prior home in the past three years.
Here are the comparisons of Conventional Loans Versus FHA Loans:
- Any conventional loans with less than 20% down payment requires the borrower to have private mortgage insurance.
- Private mortgage insurance premiums on conventional loans is much less than FHA’s 1.35% annual mortgage insurance premium.
- Most private mortage insurance premium on conventional loans are about half of FHA monthly mortgage insurance premiums.
- Another benefit with conventional loans over FHA insured mortgage loans is that once you have a loan to value of 80% LTV, your no longer need to pay private mortgage insurance premium whereas with FHA loans, you need to pay mortgage insurance premium for the life of the FHA loan.
Mortgage Rates And Loan To Value On Conventional Loans Versus FHA Loans
You will get the best rate and terms with conventional loans if you have a loan to value of at least 80% LTV.
- Those who are only putting down 5% down payment will definitely get a higher interest rate than those who are putting down a 20% down payment.
- Furthermore, those conventional mortgage loan borrowers who put 25% down payment will get a better mortgage rate than those who are putting down 20%.
- Reason being is because the mortgage lender has less risk if the borrower puts more money down and the chances of foreclosure greatly reduces because the borrower has more skin in the game.
Cases Where Conventional Loans Are Necessary
Case scenarios where conventional loans are the only option are when a home buyer wants to purchase a condominium where it is not FHA approved. To be able to qualify for a FHA insured mortgage loan for a condominium purchase, the condominium complex needs to be FHA approved. If the condominium complex is not FHA approved, the home buyer can only go with conventional loans for financing their condominium unit.
Pros And Cons On Conventional Loans Versus FHA Loans
Conventional loans has its advantages and disadvantages.
- One of the major advantages with conventional loans is that the private mortgage insurance premium is about half of FHA’s mortgage insurance premium.
- Disadvantages of conventional loans are that the maximum back end debt to income ratios are normally capped at 45% whereas with FHA insured mortgage loans, the back end debt to income ratio cap is at 56.9%.
- Conventional loans are credit score sensitive where a lower credit score borrowers will be penalized with much higher rates.
- FHA insured mortgage loans are much easier to qualify for borrowers with prior credit issues such as late payments, collections, bankruptcy, short sale, or deed in lieu of foreclosure.
- FHA insured mortgage loan borrowers can qualify for a FHA loans after two years after a Chapter 7 bankruptcy discharged date and three years after short sales, foreclosures, deed in lieu of foreclosure where conventional loans require a minimum waiting period of 4 years after a Chapter 7 Bankruptcy, deed in lieu of foreclosure, and short sale and 7 years after a foreclosure.
Mortgage Part Of Bankruptcy On Conventional Loans Versus FHA Loans
One of the greatest benefits on Conventional Loans Versus FHA Loans is that if you have a mortgage part of your Chapter 7 Bankruptcy, there is a four year waiting period to qualify for a conventional loan from the discharged date of your Chapter 7 Bankruptcy discharged date and the date of the foreclosure does not count. The foreclosure has to be finalized in order for the borrower to qualify for the Conventional Loan with the mortgage part of the Chapter 7 Bankruptcy. With FHA Loans, if you have a mortgage or mortgages part of your Chapter 7 Bankruptcy, the waiting period to qualify for a FHA Loan starts three years from the recorded date of the foreclosure. This means the waiting period does not start until the foreclosure has been recorded on FHA Loans.