This BLOG On Conventional Versus FHA Loan And Which Loan Program Is Best Was UPDATED On June 8th, 2019
Many folks with excellent credit scores assume they need to choose a conventional loan instead of other loan programs.
- They often assume that FHA loans are for folks with bad credit or first time home buyers
- However, that is not often the case
- Conventional loans do have stricter underwriting guidelines than FHA loans
- Many times, a person with excellent credit could not qualify for a conventional loan but can qualify for an FHA Loan
- An FHA Mortgage might be their only option
- We will be discussing the pros and cons of a conventional loan versus an FHA loan
- Conventional Loans will benefit borrowers with high balance student loans
- IBR Student Loan Payments are allowed with Conventional Loans but not FHA Loans
- Conventional Loans will benefit borrowers who had a mortgage included in Chapter 7 Bankruptcy but the housing event was not finalized until a later date
In this BLOG, we will discuss the benefits of using Conventional Versus FHA Loan Programs.
Benefits Of FHA Loans
The Federal Housing Administration mortgage loan program is an excellent mortgage outlet.
- HUD’s role and mission are to promote homeowners for first time home buyers and borrowers with less than perfect credit
- FHA makes homeownership affordable for first-time homebuyers and for home buyers who have had prior bad credit, bankruptcy, foreclosure, and high debt to income ratio
- FHA loans have much leaner underwriting criteria and more options to borrowers
- FHA Loans only requires a 3.5% down payment for borrowers with at least 580 FICO to qualify for FHA Loans
- Borrowers with under 580 credit scores and down to 500 FICO can qualify for FHA Loans with 10% down payment
FHA has very lenient guidelines for borrowers with bad credit. Outstanding collections and charge off accounts do not have to be paid off to qualify for FHA Loans.
FHA Loans Permit Non-Occupant Co-Borrowers
One of the features that an FHA loan offers is it allows non-occupant co-borrowers.
- Under HUD Guidelines, non occupant co-borrowers can be added to the main borrower to qualify for income for those that have high debt to income ratios
- However, under HUD Guidelines, non-occupant co-borrowers need to be related to the main borrower by law, marriage, blood for 3.5% down payment FHA Loans
If the non-occupant co-borrower is not related to the main borrower by law, marriage, blood, then the home buyer can still add them but 25% down payment is required versus 3.5%.
Conforming Guidelines On Non-Occupant Co-Borrowers
Conventional Loans allows the main borrower to add non-occupant co-borrowers.
- The benefits of conventional loans versus FHA is that the non-occupant co-borrower does not have to be related to the main borrower by law, marriage, blood
- Maximum debt to income ratio requirements on conventional loans is 50%
- There is no front end debt to income ratio requirements on conventional loans
Private Mortgage Insurance Versus FHA Mortgage Insurance Premium
An advantage of a conventional loan versus an FHA loan is that if you have 20% equity in your home, private mortgage insurance is no longer needed.
- Starting June 3, 2013, mortgage insurance premium is required on all FHA mortgage loans throughout the life of the loan
- FHA had a previous guideline where a homeowner with a 30 year fixed rate FHA loan who have been paying on their FHA loan for the past 60 months and has a 78% loan to value could have the monthly mortgage insurance premium waived
That will be no longer the case starting June 3, 2013.
Mortgage Insurance Is Cheaper For Conventional Loans
Another advantage of a conventional loan versus an FHA loan is that the monthly mortgage insurance factor is less than that of an FHA loan. The monthly mortgage insurance factor with a conventional loan varies depending on the mortgage loan borrower but normally it is safe to assume that a factor of 0.90% of the mortgage loan amount can be used as a general guideline for a conventional mortgage loan factor. However, with an FHA mortgage loan, 1.35% of the mortgage loan amount is the factor. 1.35% of the FHA mortgage loan amount will be charged as the mortgage insurance premium every year throughout the life of the FHA mortgage loan.
Mortgage Rates Are Lower For FHA Loans
A disadvantage of a conventional loan versus an FHA loan is that conventional mortgage rates are generally higher than an FHA mortgage loan. Current conventional mortgage rates are at 4.5% where starter mortgage rates on FHA mortgage loans are at 4.25%.
- As discussed earlier, tougher underwriting criteria applies to a conventional loan versus an FHA loan
- There is a 2-year waiting period to apply for an FHA loan after Chapter 7 Bankruptcy
- There is a 3-year waiting period after a foreclosure, deed in lieu of foreclosure, short sale to qualify for FHA Loans
- However, with a conventional loan, the minimum waiting period is at least 4 years after short sale and deed in lieu of foreclosure
- There is a seven-year waiting period to qualify for conventional loans after a foreclosure
- There is a four-year waiting period to qualify for conventional loans after Chapter 13 Bankruptcy dismissal date
- There is a two-year waiting period after Chapter 13 Bankruptcy discharge date to qualify for conventional loans
Most conventional mortgage lenders do not lend to conventional mortgage loan borrowers after a 7-year waiting period had elapsed after they have had a foreclosure.
Credit Standards Are Higher For Conventional Loans
Credit score minimums are stricter on a conventional loan versus an FHA loan.
- Minimum credit score requirements for conventional loans is 620 FICO
- Minimum credit score requirements for 3.5% down payment FHA Loans is 580 FICO
- Borrowers under 580 and down to 500 FICO can qualify for FHA Loans with 10% down payment
High Student Loan Balances
Borrowers with high student loan balances and have Income-Based Repayment need to go with conventional loans. Fannie Mae and Freddie Mac allow IBR Payments that report on the borrower’s credit report. FHA requires a fully amortized monthly payment over an extended term (25 years or longer). Or for those who are on an IBR Payment and/or have student loans in deferment, FHA requires to take 1% of the outstanding student loan balance and use that figure as a monthly hypothetical debt.
If you have any questions on the advantages and disadvantages in a conventional loan versus an FHA loan, please contact Gustan Cho of Gustan Cho Associates at 262-716-8151 or text us for faster response. Or email us at firstname.lastname@example.org. Visit us at Gustan Cho Associates at www.gustancho.com .