Gustan Cho The Mortgage Expert,
Publish On: March 24, 2024
This guide covers comparing FHA versus conforming mortgages. FHA and conforming mortgages are the two most popular mortgage loan programs in the United States for homebuyers. Which loan program should homebuyers choose. There are pros and cons to FHA versus conforming mortgages.
There are times where borrowers may qualify for FHA versus conforming mortgages. Other times, borrowers who qualify for conventional loans may not qualify for FHA loans.
HUD, the parent of FHA, insures and partially guarantees FHA loans. HUD is not a lender and does not originate, process, underwrite, fund, nor services FHA loans. HUD is a large federal agency and its role is to insure FHA loans to HUD-approved mortgage lenders. In the following paragraphs, we will be comparing the pros and cons between FHA versus conforming mortgages.
Who Originates and Funds FHA Loans
Private lenders originate, process, underwrite, fund, and service FHA mortgages. Once the loan funds, the funded loan is sold on the secondary market to Fannie Mae or Freddie Mac. Fannie Mae and Freddie Mac are the two mortgage giants is often referred to as Government-Sponsored Enterprises (GSE). The role of HUD is to insure private lenders who fund FHA loans in the event borrowers default and the property goes into foreclosure. The loss the lender takes is partially guaranteed by HUD.
Due to the government guarantee of the U.S. Department of Housing and Urban Development (HUD), lenders can offer FHA loans to borrowers with less than perfect credit, higher DTI, low down payment at very competitive mortgage interest rates.
Conventional loans are often referred to as conforming loans. This is because they need to conform to Fannie Mae and Freddie Mac guidelines. Conforming loans does not have any government insurance guarantee. Lenders need to conform to Fannie Mae or Freddie Mac guidelines if they want to sell the loan to Fannie Mae or Freddie Mac after its funds. In order for Fannie Mae or Freddie Mac to purchase these loans, borrowers need to conform to their guidelines. Fannie Mae and Freddie Mac will not purchase mortgage loans that do not conform to their agency mortgage guidelines. Get qualify for FHA Loan
Which Loan Program Is Best For You
Oftentimes home buyers will qualify for both FHA and conforming loans. There are other times where a borrower may qualify for FHA but not Conventional and other times the other way around. We will cover the benefits of FHA versus conforming mortgages to educate our viewers on which loan program is best for them. There are many blogs on the internet about FHA versus conforming mortgages. Unfortunately, many blogs are not written by licensed loan officers but by content writers. Many information is not correct.
Benefits of Conforming Home Loans
Conventional loans are called conforming loans because they need to conform to Fannie Mae or Freddie Mac agency guidelines. If the loan does not meet any of the Fannie Mae or Freddie Mac agency guidelines, it is call non-conforming. Fannie Mae or Freddie Mac are the country’s largest buyers of mortgage-backed security. Fannie Mae and Freddie Mac will not buy any mortgage that does not conform to their agency guidelines.
One of the greatest benefits of conventional loans versus FHA is those home buyers are allowed to purchase second and investment homes. FHA is for owner-occupant properties only.
This is due to the fact they need to conform to Fannie Mae or Freddie Mac mortgage guidelines. Fannie Mae and Freddie Mac’s role is to make the mortgage markets liquid by buying home loans that conform to their guidelines by private lenders. By doing so, it relieves lenders of paying off their warehouse line of credit, and this way lenders can originate and fund more loans. Any loans that do not conform to Fannie Mae and Freddie Mac guidelines are called non-conforming loans. Jumbo mortgages and non-QM loans are examples of non-conforming loans.
Differences Between FHA versus Conforming Mortgages
FHA versus conforming mortgages are two different types of home loans with distinct features and requirements. In the following paragraphs, we will do a comparison between FHA versus conforming mortgages.
FHA (Federal Housing Administration) Mortgages
Insured by the FHA, which is part of the U.S. Department of Housing and Urban Development (HUD). Lower credit score requirements (minimum 500-580 depending on down payment). Down payment as low as 3.5% of the home’s purchase price. Borrowers are required to pay upfront and annual mortgage insurance premiums. More flexible underwriting guidelines, making them more accessible to borrowers with imperfect credit or limited funds. Loan limits vary by county but are generally lower than conforming loan limits. Can be used for single-family homes, multi-unit properties, approved condos, and manufactured homes.
Conforming Mortgages
Must conform to guidelines set by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. Typically require higher credit scores (usually 620 or higher). Down payment of at least 3-5% for first-time homebuyers, and 20% to avoid private mortgage insurance (PMI). Stricter underwriting guidelines, focusing on credit history, income, and asset documentation. Loan limits are set annually and vary by county, with higher limits in high-cost areas. Can be used for single-family homes, multi-unit properties, approved condos, and some manufactured homes.
Key Differences of FHA versus Conforming Mortgages
FHA loans have more lenient credit and down payment requirements but require mortgage insurance. Conforming loans have stricter credit and income guidelines but may not require mortgage insurance with a 20% down payment. FHA loans have lower loan limits, while conforming loans have higher limits in high-cost areas. Conforming loans are not backed by the government, while FHA loans are insured by the FHA. The choice between an FHA or conforming mortgage depends on factors like credit profile, available down payment, desired loan amount, and long-term costs associated with mortgage insurance premiums. Both programs aim to facilitate homeownership, but with different target borrower groups and requirements. Get qualify for FHA Loan with low credit scores
Maximum DTI Caps on Conventional Loans
Maximum debt-to-income ratio requirements on conventional loans is 50% to get an approve/eligible per automated underwriting system approval: Conforming loans are more credit-driven than FHA loans due to no government guarantee. The higher borrowers’ credit scores, the lower the mortgage rates. No private mortgage insurance is required if the homebuyer puts at least 20% down on the home purchase.
Any loan-to-value higher than 80% LTV requires private mortgage insurance. Private mortgage insurance can be canceled when the loan to value goes below 80% LTV.
With FHA loans, the annual FHA MIP of 0.55% cannot be canceled on a 30 year FHA term loan. FHA MIP is fixed at 0.55% of the FHA loan balance. With conforming loans, private mortgage insurance can vary depending on borrowers’ credit scores and other factors. Lower credit score conforming borrowers will definitely get higher private mortgage insurance as well as much higher rates than FHA loans.
Down Payment Requirements on FHA Versus Conforming Mortgages
Many homebuyers have the misconception that they need a 20% down payment to qualify for conventional mortgages. Home Ready, Home Possible, and Home Advantage are conforming loan programs that all have low down payment requirements.
There are maximum loan limit requirements in some areas while other areas do not. Down payment requirements are lower than FHA loans.
HUD requires 3.5% down payment for homebuyers with at least a 580 credit score. Conforming loans require a 3% to 5% down payment and the minimum credit score to qualify is 620. All loan programs require down payment and closing costs with the exception of VA and USDA home loans. HUD allows up to 6% seller concessions for sellers to contribute towards buyers closing costs. Conventional loans are allowed up to 3% seller concessions for owner occupant properties and 2% for investment properties.
Benefits of FHA versus Conforming Mortgages
There are many benefits of FHA versus conforming mortgages. Conforming loans cap debt-to-income ratios up to 50% to get an approve/eligible per AUS. Front-end DTI does not matter on conventional loans. HUD, the parent of FHA, allows up to 46.9% front-end and 56.9% back-end DTI to get an AUS approval. HUD is more lenient when it comes to outstanding collections and charged-off accounts. Borrowers do not have to pay outstanding collections and charged-off accounts to qualify for FHA loans.
Waiting Period After Bankruptcy and Foreclosure Comparison on FHA versus Conforming Mortgages
One of the greatest benefits of FHA loans is that people in a Chapter 13 Bankruptcy repayment plan can qualify for a mortgage after making 12 months timely payments to Chapter 13 Bankruptcy Trustee. There is no waiting period after the Chapter 13 Bankruptcy discharged date to qualify for FHA loans. There is no waiting period to qualify for FHA Loans After Chapter 13 Bankruptcy Dismissal if borrowers were timely on their payments for the past 12 months.
FHA loans require a two-year waiting period to qualify after the Chapter 7 Bankruptcy discharged date. HUD requires a three-year waiting period to qualify for FHA Loans after foreclosure, deed in lieu, short sale.
Fannie Mae and Freddie Mac require a four-year waiting period to qualify for conventional mortgages after Chapter 7 discharge, deed-in-lieu, or a short sale. There is a seven-year waiting period after regular foreclosure to qualify for conforming mortgages. Conventional loans require a two-year waiting period to qualify after the Chapter 13 Bankruptcy discharged date. There is a four-year waiting period to qualify for conventional loans after the Chapter 13 dismissal date. Apply for FHA Loan after bankruptcy, click here
Benefits of Conventional versus FHA Mortgages With High Student Loan Balances
Large student loan balances are one of the biggest issues borrowers face when trying to qualify for home loans. Conventional and FHA loans allow Income-Based Repayment (IBR) as long as it reflects on a credit report. HUD has changed its student loan guidelines in recent months. HUD used to requires 1.0% of the student loan balance as hypothetical monthly debt on deferred student loans. However, HUD now requires either a 0.50% hypothetical debt of the outstanding student loan balance or they will take an IBR payment if it reports on the credit bureaus. Borrowers with high student loan balances can now apply for either mortgage loan program after HUD had changed their student loan guidelines recently.
Prior Mortgages Included in Chapter 7 Bankruptcy
Homebuyers with prior mortgage included in Chapter 7 Bankruptcy can possibly qualify for conforming loans but not FHA Loans due to waiting period requirements. Conforming Loans require a four-year waiting period after Chapter 7 Bankruptcy discharged date if they have prior mortgages included in Chapter 7 Bankruptcy. The housing event needs to be finalized but the date of foreclosure, deed in lieu, a short sale do not matter. The waiting period start date is the date of the discharged date of Chapter 7. This applies to VA and USDA Loans but not FHA Loans. With FHA Loans, there is a three-year waiting period to qualify after the recorded date of the housing event and the discharged date of Chapter 7 does not matter on borrowers with prior mortgages included in Chapter 7 Bankruptcy. Lenders are not in a major hurry to transfer the deed over to their names so the transfer date of the housing event is normally many years after the discharged date. Get qualify for FHA Loan in chapter 7 bankruptcy
