FHA Versus Conventional Loans

This BLOG On FHA Versus Conventional Loans Was Written By Gustan Cho

There are many differences between FHA Versus Conventional Loans. FHA Loans are not just for borrowers with bad credit. FHA does have much lenient mortgage guidelines than Conventional Loans. Here are key differences between FHA Versus Conventional Loans:

  • FHA Loans are for primary owner occupied properties only
  • There is a one time upfront FHA mortgage insurance premium of 1.75% and a lifetime annual mortgage insurance premium of 0.85% over the life of a 30 year fixed rate FHA Loan
  • FHA Loans are guaranteed by HUD which is the parent of FHA. FHA is not a lender and does not originate nor fund FHA Loans. FHA Loans are called government loans because FHA, which is a government agency, guarantees private lenders on the FHA Loans they fund against borrower defaulting on their FHA Loans and going into foreclosure
  • Conventional Loans are not government loans. Fannie Mae and Freddie Mac sets the standards for Conventional Loans. Conventional Loans is called Conforming Loans because they need to conform to Fannie Mae and Freddie Mac Standards
  • Private mortgage insurance is not required on Conventional Loans with loan to value of at least 80% LTV or less. Private mortgage insurance is required on loan to value that is greater than 80% LTV, however, once the loan to value falls to 80% LTV or less, private mortgage insurance can be canceled on Conventional Loans
  • You can qualify for a second home loan and investment property loan with a Conventional Loan

Advantages Of FHA Versus Conventional Loans

The popularity of FHA Versus Conventional Loans is a given. More Americans close with FHA Versus Conventional Loans so FHA Loans are far more popular in the United States. FHA is much more lenient on credit score requirements than Conventional Loans. Here are the Credit Score Requirements on FHA Versus Conventional Loans:

  • FHA requires a 580 FICO Credit Score for a 3.5% down payment home purchase loan
  • Borrowers with under 580 FICO can qualify for FHA Loans, however, 10% down payment is required
  • Conventional Loans require a minimum of 620 FICO Credit Score to qualify

Both FHA and Conventional Loan Programs require timely payments for the past 12 months. Just meeting the minimum credit scores does not guaranteed mortgage approval. Mortgage Lenders want to see that borrowers are able to make their monthly proposed mortgage payments as well as their other monthly minimum debt obligations.

Debt To Income Ratio Advantages Of FHA Versus Conventional Loans

There are huge advantages to borrowers with high debt to income ratio in qualifying for FHA Versus Conventional Loans. Here are the advantages of FHA Versus Conventional Loans on debt to income ratio requirements:

  • FHA DTI is set at 43% for borrowers with credit scores under 620 FICO, however if the borrower has credit scores of 620 or higher, the front end DTI is set at 46.9% and back end DTI is set at 56.9%
  • With Conventional Loans, Fannie Mae sets the maximum debt to income ratio at 45% and Freddie Mac will set it at 50% DTI

Waiting Period After Bankruptcy And Foreclosure With FHA Versus Conventional Loans

  • A 2 year waiting period is required After A Chapter 7 Bankruptcy discharged date to qualify for a FHA Loan
  • Borrowers can qualify for FHA Loan one year into a Chapter 13 Bankruptcy repayment plan with the approval of the Chapter 13 Bankruptcy Trustee
  • Borrowers can qualify for Conventional Loans four years after a Chapter 7 Bankruptcy discharged date.
  • There is no waiting period to qualify for a FHA Loan after a Chapter 13 Bankruptcy discharged date but needs to be a manual underwrite if the discharged date of the Chapter 13 Bankruptcy discharge has not been seasoned for at least two years. Verification of Rent is mandatory with all manual underwriting
  • You need to wait two years after a Chapter 13 Bankruptcy discharge date to qualify for a Conventional Loan
  • There is a 3 year waiting period to qualify for a FHA Loan after the recorded date of foreclosure or date of sheriff’s sale date
  • There is a 3 year waiting period to qualify for a FHA Loan from the recorded date of a deed in lieu of foreclosure or date of sheriff’s sale
  • There is a 3 year waiting period to qualify for a FHA from a date of a short sale
  • There is a 7 year waiting period to qualify for a Conventional Loan after a recorded date of a foreclosure or date of sheriff’s sale of a foreclosure
  • There is a four year waiting period to qualify for a Conventional Loan after the recorded date of deed in lieu of foreclosure or sheriff’s sale date
  • There is a four year waiting period to qualify for Conventional Loan after the date of a short sale
  • FHA treats foreclosure, deed in lieu of foreclosure, and short sale the same and the waiting period to qualify for a FHA Loan after these three housing events are all 3 years
  • Fannie Mae and Freddie Mac have different waiting period requirements after foreclosure which is 7 years
  • Fannie Mae and Freddie Mac has a mandatory year waiting period to qualify for a Conventional Loan after a deed in lieu of foreclosure or short sale. This applies for owner occupied homes, second homes, and investment homes

Mortgage Part Of Bankruptcy With FHA Versus Conventional Loans

Mortgage Part Of Bankruptcy: Here are the rules and mortgage guidelines if you have a mortgage or mortgages part of your Chapter 7 Bankruptcy:

  • Borrowers who has a mortgage or mortgage part of their Chapter 7 Bankruptcy there is a three year waiting period from the recorded date of their foreclosure or sheriff’s sale. The waiting period start date is the recorded date of the foreclosure and NOT the discharged date of the Chapter 7 Bankruptcy nor the day that the property was surrendered.  Although the balance was discharged on the Chapter 7 Bankruptcy.
  • There is a four year waiting period after the discharged date of your Chapter 7 Bankruptcy to qualify for a Conventional Loan if you had a mortgage as part of your Chapter 7 Bankruptcy even if your foreclosure was not recorded until a much later date after your discharged date of your Chapter 7 Bankruptcy
  • If you had a mortgage part of your Chapter 7 bankruptcy and the foreclosure did not record until years later, you many qualify for a Conventional Loan BUT NOT Qualify for a FHA Loan

If you have more questions on FHA Versus Conventional Loans and see which loan program is best for you, please contact Gustan Cho at 262-716-8151 or text for faster response. You can also email Gustan Cho at gcho@gustancho.com . We are available 7 days a week, evenings, weekends, and holidays.

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.

Comments are closed.