Credit And DTI Guidelines On Conventional Loans Versus FHA Loans

This BLOG On Credit And DTI Guidelines On Conventional Loans Versus FHA Loans Was UPDATED On January 2nd, 2018

Credit And DTI Guidelines On Conventional Loans have tighter mortgage lending requirements 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
  • To qualify for a 5% minimum down payment conventional loan, the mortgage loan applicant needs a minimum of a 620 credit score
  • First time home buyers can qualify for 3% down payment conventional loans with higher credit scores
  • First time home buyers is defined as someone who has not owned a home in past three years
  • Many folks believe that FHA loan programs are just for those with prior bad credit or low incomes
  • The above statement is not true
  • There are many times where a mortgage loan applicant with great credit and income turn cannot qualify for FHA Loans but will qualify for Conventional Loans

2 To 4 Unit Home Purchases

Cases where home buyers should benefit with FHA Loans and NOT Conventional Loans is when they are purchase a multi-unit home as their primary residence.

  • For example, multi-family homes up to 4 units are considered residential homes
  • 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 homes BUT NOT on two to four unit properties
  • Fannie Mae and Freddie Mac requires 15% down payment on two unit owner occupant homes
  • 15% down payment is required for 3 to 4 unit owner occupant units on conventional loans

This is a case where a home buyer with excellent credit and income will benefit with FHA Loans and NOT Conventional Loans.

New Credit And DTI Guidelines On Conventional Loans Versus FHA Loans

New Credit And DTI Guidelines On Conventional Loans has been increased effective January 2018 by the FHFA.

  • Fannie Mae and Freddie Mac will render an approve/eligible per Automated Underwriting System on debt to income ratios up to 50% DTI
  • Although minimum Credit And DTI Guidelines On Conventional Loans is 620 and 50% DTI, it is very difficult to get an approve/eligible per AUS FINDINGS on condos with such lower credit scores and higher debt to income ratios
  • Condominiums are considered riskier and loan level pricing adjustments applies

Changes have been implemented in 2018 for New Credit And DTI Guidelines On Conventional Loans as well as FHA Loans.

Here are the basic 2018 FHA mortgage lending guidelines:

  • Maximum loan amount has been dropped from $410,000 to $271,000 two years ago unless it was a high cost county area or multi-family units
  • However, FHA Guidelines On Loan Limits has increased to $294,515 effective January 1st, 2018
    • The lower loan limits on FHA Loans creates a problem for those who are seeking to purchase a higher priced home 
    • Home Buyers of higher priced homes needed to settle with conventional loans versus FHA Loans
    • Those who need to purchase a larger higher priced home need to go the conventional loan route
  • 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 500 FICO and 579 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

Conforming Loans Limits got increased to $453,100 effective January 1st, 2018.

Mortgage Guidelines On Collections

Collections:  New collections rules have been implemented by FHA, VA, Fannie Mae, Freddie Mac:

  • Collections with outstanding balance of over $2,000:
    • 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 even though borrower does not have to pay anything
  • Prior to this new rule, unsatisfied open balances on collection accounts were not calculated in debt to income ratio calculations
  • If borrowers enter into a written payment agreement with the collection agency, then the new monthly payment agreement will be used towards the calculation of the debt to income ratios in lieu of the 5%
  • Medical collections are exempt

Mortgage Guidelines On Credit Disputes

There are strict mortgage guidelines on credit disputes during mortgage process.

Credit disputes:  Credit disputes applies to both FHA loans, USDA Loans, VA Loans, and Conventional loans.

  • Borrowers cannot have any credit disputes with open credit balances ( certain rules applies ) in general
  • For example, if someone has a derogatory credit item that is five years old with a $5,000 balance, they cannot try to delete that item by disputing it to the credit bureaus
  • Stating and disputing that the derogatory item does not belong to them in hopes of the creditor not responding back and hoping in getting that derogatory credit item removed will not work
  • If it is an active pending dispute, mortgage application process will come to an immediate halt
  • Before it can proceed again, mortgage borrower need to retract the credit disputes
  • Unfortunately, if borrower retract the credit dispute, credit scores will likely drop
  • Medical credit disputes with open credit balances are exempt from this rule
  • Non-medical credit disputes with zero balances are exempt from credit dispute guidelines
  • Any non-medical collections with aggregate outstanding balance under $1,000 is exempt from credit disputes

Mortgage Guidelines On Waiting Period After Bankruptcy And Foreclosure

Waiting period after bankruptcy, foreclosure, deed in lieu of foreclosure, short sale:

  • 2 year waiting period after discharge date of Chapter 7 bankruptcy
  • 3 year waiting period after recorded date of foreclosure and/or deed in lieu of foreclosure
  • 3 year waiting period after the short sale date reflected on the sale’s HUD’s settlement statement
    • FHA Back to Work Extenuating Circumstances due to an economic event is no longer in existence 
    • Back in August 15, 2013 HUD launched the Back To Work Mortgage which waived 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 supposedly made the dream of home ownership possible to those with a prior bankruptcy and foreclosure after a one year waiting period versus the traditional longer term
    • The Back to Work mortgage program turned out to be a total disaster
    • 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
    • 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

No Waiting Period After Housing Event

As mentioned earlier, the FHA Back To Work Extenuating Circumstances Due To An Economic Event Loan Program turned out to be a total flop.

  • HUD discontinued it back in 2014
  • Countless of FHA borrowers participated in the FHA Back To Work Mortgage Program
  • But only a fraction of them closed on their loans
  •  The Gustan Cho Team at USA Mortgage now offers NON-QM Loans which has no waiting period after foreclosure, deed in lieu of foreclosure, short sale
  • However, there is a one year waiting period after Chapter 7 Bankruptcy
  • 10% to 20% down payment is required on NON-QM Loans 
  • Amount of down payment depends on borrowers credit scores

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 
  • 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

2018 Credit And DTI Guidelines On Conventional Loans

Here are 2018 Credit And DTI Guidelines On Conventional Loans:

  • Minimum credit scores is 620 FICO
  • Down payment requirements: 
    • 5% for single family homes, condos, town homes
    • 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
  • Waiting period: 
    • Waiting period after a bankruptcy, foreclosure, deed in lieu of foreclosure, short sale is much tougher for conventional loans
    • There is a seven year waiting period after foreclosure
    • Four year waiting period after the recorded date of deed in lieu of foreclosure
    • Four year waiting period after short sale
    • Four year waiting period after Chapter 7 Bankruptcy discharge date if mortgage was part of Chapter 7 Bankruptcy
      • The housing event can happen after the discharged date of the Chapter 7 Bankruptcy
      • The mortgage cannot be re-affirmed

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, they 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 the buyer wants to purchase a second home and/or investment property
  • FHA only allows primary owner occupant units to be financed
  • Second home financing and investment properties is not allowed under FHA mortgage lending guidelines

Qualifying For Home Loan With Direct Lender With No Overlays

Home Buyers or homeowners needing a home mortgage with a direct lender with no overlays can contact The Gustan Cho Team at USA Mortgage at 262-716-8151 or email us at gcho@usa-mortgage.com. We are available 7 days a week, evenings, weekends, and holidays. The Gustan Cho Team at USA Mortgage has no lender overlays on government and conventional loans.

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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