Comparing FHA Versus Conforming Mortgages And Which Loan Is Best

Gustan Cho Associates are mortgage brokers licensed in 48 states

This Article Is About Comparing FHA Versus Conforming Mortgages And Which Loan Is Best

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 may not qualify for FHA Loans. HUD, the parent of FHA, insures and partially guarantees FHA Loans. FHA is not a lender and does not originate, process, underwrite, fund, nor services FHA Loans.

Who Originates And Funds FHA Mortgages

Funds FHA Mortgages

Private lenders originate, process, underwrite, fund, and services FHA Mortgages. The role of FHA 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 FHA. Due to this government guarantee, lenders can offer FHA Loans to the borrower with less than perfect credit, higher DTI, low down payment at very low mortgage interest rates.

Conventional Loans are often referred to as conforming loans. This is because they need to conform to Fannie Mae and/or Freddie Mac Guidelines. Conforming Loans does not have any government insurance guarantee. Lenders need to conform to Fannie/Freddie guidelines if they want to sell the loan to Fannie/Freddie after its funds. In order for Fannie/Freddie to purchase these loans, borrowers need to conform to their guidelines.

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 Conventional 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 and/or Freddie Mac agency guidelines. If the loan does not meet any of the Fannie/Freddie agency guidelines, it is call non-conforming. Fannie and/or Freddie 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 and/or Freddie Mac Mortgage Guidelines. Fannie and Freddie’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/Freddie Guidelines are called non-conforming loans. Jumbo Mortgages and non-QM loans are examples of non-conforming loans.

Maximum DTI Caps On Conventional Loans

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 0.85% cannot be canceled on a 30 year FHA term loan. FHA MIP is fixed at 0.85% 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 home buyers 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.

FHA requires 3.5% down payment for home buyers 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% sellers concessions for sellers to contribute towards buyers closing costs. Conventional Loans are allowed up to 3% sellers 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. FHA is laxer 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.

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, 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.

Benefits On Conventional Versus FHA Mortgages With High Student Loan Balances

What are the benefits of conventional mortgages compared to an FHA 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 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.