Qualification Requirements On Conventional Loans Versus FHA Loans

Qualifying With Conventional Loans Versus FHA Loans

This BLOG On Conventional Loans Versus FHA Loans Was Written By Gustan Cho NMLS 873293

This BLOG On Qualification Requirements On Conventional Loans Versus FHA Loans Was UPDATED On January 14th, 2018

There are major differences in qualifying with Conventional Loans Versus FHA Loans.

  • We will point out the benefits and negatives of Conventional Loans Versus FHA Loans on this article
  • There are times where borrowers cannot qualify for government loans but can qualify for conforming loans
  • This is the case when previous homeowners had mortgage part of Chapter 7 Bankruptcy
  • The Gustan Cho Team at USA Mortgage has no mortgage overlays on government and conventional loans
  • Government Loans are home loans guaranteed by a government agency

Here are the three government loans:

  • FHA Loans
  • VA Loans
  • USDA Loans

What Are Conforming Loans?

Conventional Loans are often called conforming loans because they need to conform to Fannie Mae and/or Freddie Mac Guidelines. Conventional Loans are not guaranteed by the federal government but need to conform to Fannie and/or Freddie if the bank and/or lender wants to sell their conventional loan on the secondary market after it funds. Fannie and Freddie will not purchase conventional loans that do not conform to their mortgage guidelines

  • Conventional loans are credit sensitive as well as loan to value sensitive
  • The higher credit scores, the lower mortgage rates
  • The lower loan to value ratios are, the lower mortgage rates
  • Mortgage loan borrowers  can qualify for a 3.5% down payment FHA insured mortgage loan with a credit score as low as 580
  • However, the minimum credit score required for conventional loans are 620 
  • 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 

Pricing Adjustments On Conventional Loans

Since conforming loans are private loans and not guaranteed by any government agency like FHA, VA, USDA is, there are pricing adjustments due to risk factors:

  • There are credit 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 
  • If their credit scores fall to 720 the interest rate might be 4.625%
  • If their credit scores are at 700 interest rates might be at 4.75%
  • There will be a big interest hike for conventional mortgage loan borrowers with credit scores below 700 

Credit Scores of 620 is considered very low on conventional loans. Borrowers may get higher interest rates and possibly pay points with such lower credit scores.

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. First time home buyers is defined as a buyer who had no ownership in a property in the past three years. Otherwise it is 5% for home buyers who has owned a prior home in the past three years. FHA requires 3.5% down payment on home purchases.

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 0.85% annual mortgage insurance premium
  • Private mortgage insurance on conventional loans depends on the borrowers credit scores, type of property, and the loan to value
  • Private mortgage insurance is not a fixed rate on conforming loans like they are on FHA Loans
  • Another benefit with conventional loans over FHA insured mortgage loans is that once loan to value is less than 80% LTV, private mortgage insurance is no longer needed
  • With FHA loans, homeowners need to pay mortgage insurance premium for the life of the 30 year FHA loan term

Mortgage Rates And Loan To Value On Conventional Loans Versus FHA Loans

To get the best possible mortgage rates and terms on conforming loans, borrowers should have the highest possible credit scores and 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
  • 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
  • More and more condo complexes are not renewing their annual HUD Certifications so it is getting tougher and tougher to be able to purchase a condo with FHA Loans
  • VA Loans and USDA Loans do not require any down payment on home purchases

Qualifying For Mortgage During And After Chapter 13 Bankruptcy

Conventional Loan Programs do not allow for manual underwriting. VA and FHA Borrowers can qualify for VA and/or FHA Loans during and after Chapter 13 Bankruptcy.

  • Borrowers can qualify one year into a Chapter 13 Bankruptcy Repayment Plan with VA and FHA Loans
  • There is no waiting period after Chapter 13 Bankruptcy discharged date to qualify for VA and FHA Loans
  • However, any Chapter 13 Bankruptcy with less than two year seasoning after discharge date of Chapter 13 Bankruptcy needs to be manually underwritten
  • There is a two year waiting period to qualify for Conventional Loans after Chapter 13 Bankruptcy discharged date
  • There is a four year waiting period to qualify for conforming loans after Chapter 13 Bankruptcy dismissal date

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 lower than FHA’s mortgage insurance premium for borrowers with premium credit
  • Disadvantages of conventional loans are that the maximum back end debt to income ratios are normally capped at 45%
  • 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 the following:
    • Late payments
    • Collections
    • Charge Offs
    • Bankruptcy
    • Short sale
    • Seed 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
  • 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 with 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. The date of the foreclosure and/or housing event does not count. The housing event needs to be finalized (foreclosure, deed in lieu of foreclosure, short sale) in order for the borrower to qualify for the Conventional Loan with the mortgage part of the Chapter 7 Bankruptcy. With FHA Loans, VA Loans, USDA Loans, if borrower has a mortgage or mortgages part of Chapter 7 Bankruptcy, the waiting period to qualify for a government loans starts three years from the recorded date of the housing event and the discharged date of the Chapter 7 Bankruptcy does not matter. This means the waiting period does not start until the foreclosure has been recorded on government loans.

Borrowers who need to qualify for government and/or conventional loans with a direct lender with no mortgage overlays, please contact us at The Gustan Cho Team at USA Mortgage at 262-716-8151 or email us at gcho@usa-mortgage.com. We are always available to our viewers who may have any questions or want to go over a case scenario.

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