FHA Versus Conforming Loans Mortgage Lending Guidelines
This Article Is About FHA Versus Conforming Loans Mortgage Lending Guidelines
FHA Versus Conforming Loans Mortgage Lending Guidelines and benefits of each home loan programs:
There are three different types of government loans:
- FHA Loans
- VA Loans
- USDA Loans
Government loans are for primary owner-occupant homes only:
- Second home and investment properties are not eligible for FHA, VA, USDA loans
- Fannie Mae and Freddie Mac allow financing on second homes and investment properties on conventional loans
- The two most popular loan programs in the United States are FHA and Conventional loans
- Conventional loans are not government-backed loans
- Conventional loans are often called conforming loans because they need to conform to Fannie Mae and Freddie Mac Guidelines
- Lenders follow Fannie Mae and Freddie Mac Agency Guidelines on conventional loans because they need to sell the conventional loans on the secondary mortgage bond market once they fund the loan
- Lenders use their warehouse line of credit to fund conventional loans
- Once they fund the conventional loan, they need to sell the loan they fund to relieve the warehouse line of credit so they can fund more loans
- By selling them on the secondary mortgage bond market, it provides them liquidity to fund more loans
- Fannie Mae and Freddie Mac are the two mortgage giants that are the biggest buyers of conforming loans
The role of Fannie Mae and Freddie Mac is to provide liquidity in the mortgage markets to keep housing affordable to hard working Americans.
Understanding The Major Differences Between FHA Versus Conventional Loans
FHA and Conventional loans are the two most popular loan programs in the nation. A loan officer will go over the differences between the two home mortgage programs and recommend which mortgage benefits you most. 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
- For example, FHA loans only require a 3.5% down payment on 2 to 4 owner-occupant multi-family homes whereas Fannie Mae and Freddie Mac require a a 15% down payment on conventional loans
- You can go up to a 46.9% front end and 56.9% back end debt to income ratio on FHA loans to get an approve/eligible per automated underwriting system (AUS)
- Conventional loans do not have a maximum front end debt to income ratio but the maximum debt to income ratio is 50% DTI to get an approve/eligible per AUS
- 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
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 and Freddie Mac Guidelines are in effect that may benefit borrower who had a prior mortgage included in bankruptcy
- As long as the person did not reaffirm the mortgage, the new guidelines state if the person had a prior included in bankruptcy, there is a four year waiting period from the discharged date of the bankruptcy
- The date of the foreclosure, deed in lieu of foreclosure, deed in lieu of foreclosure, short sale does not matter
- This holds true even though the foreclosure, deed in lieu of foreclosure, and/or the short sale was not finalized and transferred out of the homeowners name years after the bankruptcy discharged date
- 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 of the foreclosure waiting period starts from the discharged date of the bankruptcy
- Homeowner, the borrower 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 prior mortgage included in their 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, deed in lieu of foreclosure, or short sale
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 after bankruptcy discharged date.
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:
- HUD, the parent of FHA, requires homebuyers 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
- The homebuyer needs to live in one of the units as a primary owner-occupant resident
After one year, the owner of the multi-family unit can qualify for another owner-occupant primary home if they need to upgrade to a single-family home.
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
- Deferred student loans that has been deferred for longer than 12 months are no longer exempt from debt to income ratio calculations
- 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
- This holds true even though the income-based repayment is at zero monthly payment
- The zero monthly IBR payment is used for debt to income ratio calculations on conventional loans
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. Also, there is a lifetime annual mortgage insurance premium for the life of all 30-year fixed-rate FHA loans.
- 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
- Also, private mortgage insurance is not mandatory for all 30-year fixed-rate conventional loans
- Once the borrower has a loan to value that is at 80% or lower, the private mortgage insurance can be canceled on conventional loans
- 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
HUD, the parent of FHA, recently lowered the maximum loan to value on cash-out refinance FHA loans from 85% to 80% LTV. The main reason HUD made this change was due to skyrocketing home prices throughout the nation. Home prices have been going up year after year for the past 10 years. However, the median home prices have been increasing at a higher than normal pace the past five years. Both government and private mortgage industry experts are concerned with the higher home prices and want to avoid a potential housing and/or credit meltdown like the 2008 financial crisis. It is not just HUD that lowered the loan to value cap on cash-out refinances. The U.S. Veterans Administration has lowered its loan to value on cash-out refinances from 100% LTV to 90% loan to value on VA loans. The VA had similar concerns about the alarming skyrocketing home prices just like HUD has and decided to lower the cash-out refinance loan to value cap. However, on the purchase side, the loan to value remains at 100% loan to value. Lenders can still offer 100% financing on VA loans. Fannie Mae and Freddie Mac did not change their loan to value cap on cash-out refinances. The loan to value on cash-out refinances still remains at 80% LTV. To qualify for a home mortgage with a national mortgage company licensed in multiple states with no lender overlays, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at [email protected] The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.