Pros And Cons On FHA Versus Conventional Mortgages
This ARTICLE On FHA Versus Conventional Mortgages Was Updated On March 18, 2017
Prior to home buyers starting the home buying process, it is highly recommended that they educate themselves on the type of loan program is best for them as well as not just how much they qualify but how much they can afford. Home buyers need to seek the advice of a loan officer and go over the best loan program that is best suited for their needs and long term goals. The two most common loan programs are FHA Loans and Conventional Loans. Buyers need to weigh the pros and cons on FHA Versus Conventional Mortgages.
Benefits Of FHA Versus Conventional Mortgages
The chances are that you will have a choice of FHA Versus Conventional Mortgages to compare to unless you are a veteran. Veterans have the option of VA Loans, is most likely the best mortgage residential mortgage program available. Unfortunately, VA Loans are limited to Veterans with a valid Certificate of Eligibility. It is important borrowers fully understand what a FHA Versus Conventional Mortgages are as well as the pros and cons of the two programs and which program best benefits the borrower.
The term Conventional Loan includes all loans under the current FNMA and FHLMC lending limits. Most people that have heard of FHA loans tend to associate them with purchase money transactions. However, a large portion of FHA Loans are refinances.
While purchases are the most common use, FHA loans are also available for rate and term refinance loans. The main advantage of a FHA Loan versus a Conventional Loan is that the qualifying credit criteria for a borrower is much more lenient than a conventional loan financing. The down payment standards are much more lenient as well.
On FHA Loans, a buyer is only required to put 3.5% down payment of the purchase prices. On most Conventional Loans, the minimum down payment is 5% of the purchase price. Both FHA Loans and Conventional Loans require Private Mortgage Insurance, however, FHA also requires an upfront mortgage insurance premium which is 1.75% of the loan amount.
Advantage Of FHA Versus Conventional Mortgages
FHA loans will allow the borrower who has had a few “credit problems” or those without a credit history to buy a home. A FHA Underwriter will require a reasonable explanation of these derogatories, but will approach a person’s credit history with common sense credit underwriting. Most notably, borrowers with extenuating circumstances surrounding a bankruptcy that was discharged 2 years ago can be approved for maximum financing whereas on a Conventional Loan, a borrower would need to wait 4 years after a bankruptcy discharge to qualify for a mortgage.Another advantage of a FHA Loan vs Conventional Loan is that FHA is one of the few home mortgage programs that allow a borrower to have their down payment gifted from a family member, a governmental agency, or non-profit organization. This allows home buyers without the necessary money to buy a home today.An advantage of choosing Conventional Financing over FHA Financing is that Conventional Mortgages does not require an upfront mortgage insurance premium when a borrower closes on the loan. With FHA Financing, that fee for a 30 year loan is 1.80% of the loan amount that the borrower can wrap into the mortgage. Fortunately the interest a borrower pays on his or her mortgage on a primary residence is tax deductible.
Comparing Requirements On FHA Loans Versus Conventional Loans
Here are the comparisons of FHA Credit Requirements Versus of those by Fannie Mae and Freddie Mac for Conventional Loans:
- FHA Minimum credit score requirements for a 3.5% home purchase loan is 580 FICO where both Fannie Mae and Freddie Mac require a 620 FICO
- FHA is only for owner occupied one to four unit properties
- Fannie Mae and Freddie Mac are government sponsored enterprises and are the institutions that set conforming lending guidelines
- Conventional loans allows for one to four unit single family home purchases as well as second home financing and residential investment properties up to four units
- Maximum debt to income ratio requirements on FHA Loans is 56.9% back end DTI and 46.9% DTI front end to get an approve eligible per AUS Findings only if borrower’s credit scores are over 620 FICO.
- Under 620 FICO, maximum debt to income ratio caps at 43% DTI to get an approve/eligible per Automated Underwriting System
- FHA requires a two year waiting period after a Chapter 7 Bankruptcy discharge date versus 4 years for Conventional Loans to qualify for mortgages.
- FHA requires three years waiting period after the recorded date of foreclosures and/or deed in lieu of foreclosures to qualify versus 4 years after a deed in lieu and/or short sale for Fannie Mae and Freddie Mac.
- Fannie Mae and Freddie Mac requires a four year waiting period after short sale to qualify for Conventional Loan and seven year waiting period after recorded date of standard foreclosure to qualify.
- Mortgage interest rates does not have any bearing on whether or not a borrower had prior bankruptcies, foreclosures, short sales.
- Minimum down payment for FHA Loans is 3.5% down payment if borrower credit scores are at least 580 FICO where Conventional Loans require 3% down payment for first time home buyers and 5% down payment for seasoned home buyers.
- Definition of first time home buyers are those who had no ownership in a home in the past three years.
- Borrower between 500 and 579 FICO can qualify for FHA Loans with 10% down payment.
- Fannie Mae and Freddie Mac requires 10% down payment on second home financing and 20% down payment for investment properties.
- The Gustan Cho Team at Nationwide Mortgage and Realty LLC offers NON-QM Loans as well as other loan programs.