Difference Between Conventional Loans Versus FHA Loans

Difference Between Conventional Loans Versus FHA Loans Explained

There have been major changes with both Conventional Loans and FHA Loans for 2016. On this article, we will explain the advantages and disadvantages of the difference between Conventional Loans Versus FHA Loans in 2016. There are positive changes with Fannie Mae such as when a consumer has a mortgage part of bankruptcy where the waiting period on a foreclosure will start from the discharged date of the Chapter 7 Bankruptcy discharged date and not the actual recorded date of the foreclosure with Conventional Loans. With case situations like these, a home buyer will qualify for a Conventional Loan but will not qualify for a FHA Loan because with FHA, the waiting period starts from the recorded date of the foreclosure or the sheriff’s sale after the Chapter 7 Bankruptcy discharged date. The minimum credit scores to qualify for a 3.5% down payment home purchase FHA Loan is 580 credit scores where with Conventional Loans, the minimum credit scores required to qualify for a Conventional Loan is 620 credit scores.

Difference Between Conventional Loans Versus FHA Loans: Credit Scores And Mortgage Rates

As mentioned earlier, the minimum credit score to qualify for a 3.5% down payment FHA home loan is 580 FICO credit scores. FHA Borrowers can qualify for a FHA Loan with credit scores of under 580 FICO credit scores, however, borrower with credit scores between 500 credit scores and 579 credit scores, a 10% down payment is required. To qualify for a Conventional Loan, Fannie Mae and Freddie Mac both require the mortgage borrower to have at least a 620 credit score.

Credit Scores do have an impact on mortgage rates. However, credit scores have more of an impact with Conventional Loans than they do with FHA Loans. FHA Loans are insured by FHA. HUD, or the United States Department of Housing and Urban Development, is the parent of FHA. FHA is not a mortgage lender. FHA is a governmental entity that insured FHA Loans that are originated and funded by FHA approved mortgage lenders in the event the FHA borrower defaults on their FHA Loan. Loan to value is calculated by taking the mortgage loan balance dividing it by the value of the home. That number derived is called the loan to value. The more down payment the home buyer puts down on their home purchase, the lower the loan to value. Loan to value affects mortgage rates on Conventional Loans but not on FHA Loans because with FHA Loans, the government insures the FHA Loan against the FHA borrower defaulting on their FHA Loan. Fannie Mae and Freddie Mac, the two mortgage giants who sets up the mortgage lending guidelines on Conventional Loans, does not guarantee Conventional mortgage lenders against borrower default so the more down payment the mortgage loan borrower puts down on their home purchase, the less riskier it is for the Conventional mortgage lender. To get the best conventional mortgage rates, a Conventional mortgage loan borrower needs to have credit scores of higher than 740 FICO credit scores and a down payment of 25% down payment on their home purchase. Higher credit scores and larger down payment means less risk for the mortgage lender and with less risk, that translates to lower mortgage rates. With FHA Loans, credit scores does play an impact on mortgage rates but not as much. As long as the FHA borrower has a 680 FICO credit score, the FHA borrower will get the best FHA mortgage rates. Down payment has no impact on mortgage rates with FHA Loans since the loan is guaranteed by FHA unlike with Conventional Loans. Conventional mortgage lenders do require private mortgage insurance from third party mortgage insurance companies for all mortgage borrowers who have less than 20% down payment. FHA requires FHA annual mortgage insurance premium from all FHA mortgage loan borrowers throughout the term of the 30 year fixed rate FHA mortgage loan. With FHA Loans, there is a one time upfront FHA mortgage insurance premium of 1.75% which is charged on all FHA mortgage loan borrowers and this upfront FHA MIP can be rolled into the FHA mortgage loan balance.

Difference Between Conventional Loans Versus FHA Loans: Debt To Income Ratio Requirements And Non-Occupant Co-Borrowers

Debt to income ratios is one of the most important factors when it comes to qualifying for a mortgage loan. Debt to income ratios, also referred to as DTI, is the total amount of the minimum monthly payments a borrower has divided by the borrower’s monthly gross income. That number is the debt to income ratio. The maximum debt to income ratio allowed per Fannie Mae is 45% DTI to qualify for a Conventional Loan. FHA allows a maximum debt to income ratio of up to 56.9% DTI for borrowers with credit scores of 620 credit scores and higher. For FHA mortgage borrowers who have under 620 credit scores, FHA reduces the debt to income ratio requirements to 43% DTI.

FHA allows non-occupant co-borrowers to be added on the mortgage loan of the main borrower as long as the non-occupant co-borrower is related to the borrower by marriage, blood, or marriage. Fannie Mae does not allow non-occupant co-borrowers to be added on a Conventional Loan, however, Freddie Mac does allow non-occupant co-borrowers to be added on a Conventional mortgage loan borrower.

Difference Between Conventional Loans Versus FHA Loans: Down Payment And Sellers Concession Credits

FHA requires a 3.5% down payment on a home purchase for FHA mortgage loan borrowers with at least a 580 FICO credit score. Home buyers with under 580 FICO credit scores can qualify for a FHA Loan but any FHA borrowers with credit scores between 500 FICO and 579 FICO credit scores, 10% down payment is required on a home purchase. FHA allows up to a 6% sellers concession from the home seller to contribute towards the home buyer’s closing costs. Sellers concessions can only be used for closing costs and not for the down payment on a home purchase. Any overages with sellers concessions needs to go back to the home seller and the home seller cannot give a cash kick back to the home buyer with sellers concessions overages.

Fannie Mae will allow 3% down payment on a home purchase for a Conventional mortgage loan borrower, however, the home buyer needs to be a first time home buyer. Regular home buyers require 5% down payment on a Conventional Loan home purchase. Freddie Mac will home buyers who have not owned a home for the past 3 years a 3% down payment home purchase on a Conventional Loan. If the home buyers are seasoned home buyers, then a 5% down payment is required on a Conventional Loan home purchase. Fannie Mae and Freddie Mac will allow up to a 3% sellers concessions by the home seller to contribute for a home buyers closing costs for primary owner occupant home purchases and second home purchases. The sellers concessions will be limited to 2% sellers concessions for investment properties. Any overages with sellers concessions needs to go back to the home seller and the home seller is not allowed to give any kick backs to the home buyer with seller concession overages. Sellers concessions can only be used for closing costs and not for the down payment on a home purchase.

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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