Advantages And Disadvantages Of Conventional Versus FHA Loan

This BLOG Advantages and Disadvantages of Conventional Versus FHA Loan Was UPDATE On July 9, 2017

Many folks with excellent credit scores assume they need to choose a conventional loan versus a FHA loan.  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 but in many times, a person with excellent credit could not qualify for a conventional loan and a FHA mortgage loan might be their only option.  We will be discussing the pros and cons of a conventional loan versus a FHA loan.

Benefits of FHA Loans

The Federal Housing Administration mortgage loan program is an excellent mortgage outlet that make 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 the mortgage loan borrowers.

FHA Loans Permit Non-Occupant Co-Borrowers

One of the features that a FHA loan offers a mortgage loan borrower is that the Federal Housing Administration offers a non occupant co-borrower to qualify for income for those that have high debt to income ratios.  A conventional loan versus a FHA loan does not offer a non-occupant co-borrower.  Plus, the debt to income ratio on most conventional loans are capped at 45%.   I have conventional loan mortgage lenders that can go up as high as a 50% debt ratio, but mortgage rates will be higher.

Private Mortgage Insurance Versus FHA Mortgage Insurance Premium

An advantage of a conventional loan versus a 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.  Currently, a homeowner with a 30 year fixed rate FHA mortgage loan who has been paying on their FHA loan for the past 60 months and has a 78% loan to value can 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 a FHA loan is that the monthly mortgage insurance factor is less than that of a FHA loan.  The monthly mortgage insurace 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 a 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 a FHA loan is that conventional mortgage rates are generally higher than a FHA mortgage loan.  Current conventional mortgage rates are at 3.75% where starter mortgage rates on FHA mortgage loans are at 3.25%.

As discussed earlier, tougher underwriting criteria applies to a conventional loan versus a FHA loan.  There is a 2 year waiting period to apply for a FHA loan after a bankruptcy.  There is a 3 year waiting period to apply for a conventional loan after a foreclosure.  However, with conventional loan, the minimum waiting period is at least 4 years and that is not a guarantee.  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 a FHA loan.  Most conventional require a 640 FICO minimum credit score and with that low score, you can bank on paying a high mortgage rate.  Most conventional mortgage lenders want to see a credit score of 680 FICO credit score or higher for descent rates.  Minimum credit scores for FHA mortgage loan borrowers are at 530 FICO.  However, if you want a descent FHA mortgage rate, the ideal credit score is 620 FICO or higher.

FHA Loans Have Higher Debt to Income Ratio Caps

For those mortgage loan borrowers who have high debt to income ratios, I have FHA mortgage wholesale lenders in California, Illinois and Florida that can get a mortgage loan borrower qualified with a 56.9% debt to income ratio.

If you have any questions on the advantages and disadvantages in a conventional loan versus a FHA loan, please contact Gustan Cho of Gustan Cho Associates at 262-716-8151 or email gcho@gustancho.com.  You can also visit Gustan Cho Associates at  www.gustancho.com .

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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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