FHA Versus Conventional Loans Mortgage Lending Guidelines
This BLOG On FHA Versus Conforming Loans Mortgage Lending Guidelines Was UPDATED And PUBLISHED On October 3rd, 2019
Many people think that FHA Loans are loans for home buyers with bad credit, low credit scores, or other credit issues.
- This may be true but it is not always the case
- There are cases where home buyers with excellent credit and income choose FHA versus Conforming Loans, which we will cover on later paragraphs of this blog
- Some home buyers who qualify for conventional loans choose FHA Loans instead
- This is because FHA offers better terms on the particular property purchase and/or refinance mortgage program
- Depending on borrower’s situation, FHA Loan Versus Conforming Loans may or may not have its benefits
- Some buyers do not have any other choice but to go with a FHA Loan
- Others can only go with a conventional and do not qualify for FHA Loans
In this article, we will cover and discuss FHA Versus Conventional Lending Guidelines.
Cases Where Buyer Does Not Qualify For FHA But Qualify For Conventional Loans
There are new Fannie Mae Mortgage Lending Guidelines that went into effect last August 2014 with regards to mortgage part of bankruptcy.
- Borrowers with a prior mortgage included in bankruptcy, new Fannie Mae Guidelines state that the waiting period of the foreclosure starts from the discharged date of the Chapter 7 Bankruptcy
- This holds true even though the foreclosure was not finalized and transferred out of the homeowners name into the name of lender
- The deed can be transferred out of the homeowners name into the lender’s name or other owners name after the discharged date of the Chapter 7 Bankruptcy at a later date
- Regardless, the waiting period for the foreclosure waiting period starts from the discharged date of the bankruptcy
- Homeowner cannot have reaffirmed the mortgage after the bankruptcy
- There is a four year waiting period to qualify for a conventional loan if borrowers had a mortgage part of bankruptcy to qualify for conventional loans
- With FHA Loans, it is different
- There is a three year waiting period from the recorded date of the foreclosure
The recorded date is the date when the deed was transferred out of borrower’s name into the name of the lender and/or date of the sheriff’s sale.
Benefits On Multi Unit Properties Between Government And Conforming Loans
Home buyers purchasing a two to four unit building or multi unit property (up to 4 units are considered residential properties), a great benefit with FHA Versus Conforming Loans:
- FHA requires home buyers to put down 3.5% down payment on 2 to 4 unit owner occupant multi family properties
- Conforming Guidelines require 15% down payment on 2 to 4 unit owner occupant multi family home purchases
Student Loan Guidelines
HUD requires that 1.0% of the outstanding student loan balance to be counted as borrowers hypothetical monthly debt. Deferred student loans are no longer exempt on FHA Mortgages.
- Income Based Repayments or IBR is not allowed under HUD Student Loan Guidelines
- However, Fannie Mae and Freddie Mac both allow Income Based Repayments (IBR) as long as the student loan payments report on all three credit bureaus
Borrowers with high student loan payments may need to go with conventional versus FHA loans.
Disadvantages Of FHA Versus Conforming Loans
One of the major disadvantages with FHA Versus Conforming Loans is that with FHA Loans, there is an upfront FHA mortgage insurance premium and an annual mortgage insurance premium for the life of the Loan.
- This holds true no matter what the homeowner’s loan to value is. With conventional loans, there is no upfront private mortgage insurance
- But there is private mortgage insurance if the homeowner has less than 20% equity in their home
- Private mortgage insurance is much cheaper than FHA mortgage insurance premium for borrowers with higher credit scores
Private mortgage insurance can be canceled once the homeowner has at least 20% equity in their home.
Cash-Out Refinance Mortgage On FHA Loan Versus Conventional Loan
One advantage with cash-out refinance mortgage loans is that FHA will allow up to 85% loan to value on a cash-out refinance mortgage loan whereas with conventional loans, the maximum loan to value on a cash-out refinance mortgage is 80% loan to value. That extra 5% cash-out may be extremely important to some homeowners.