This ARTICLE On FHA Versus Conventional Mortgages On Home Purchase And Refinance Was UPDATED On June 26th, 2019
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:
- Borrowers should know not just how much they qualify but how much they can afford
- Home buyers need to seek the advice of a loan officer
- Need to 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 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 an FHA Versus Conventional Mortgages are as well as the pros and cons of the two programs
- Need to weight the pros and cons and see which program best benefits the borrower
Alex Carlucci, a senior vice president at Gustan Cho Associates, says the following about FHA Home Loans:
An FHA loan is a mortgage issued by a federally approved bank or financial institution that, unlike a conventional mortgage, is insured by the Federal Housing Administration. This mortgage insurance provides the security that qualified lenders need in order to take on a riskier loan.
But that security comes with a cost for the buyer: With FHA loans, the buyer must pay a 1.75 percent upfront mortgage insurance premium at closing, regardless of the down payment. Then, the buyer must make mortgage insurance payments for the life of the FHA loan if the down payment is less than 10 percent. It can be canceled after 11 years if the down payment is 10 percent or more.
Advantage Of FHA Versus Conventional Mortgages
Michael Gracz, the National Sales Manager of Gustan Cho Associates, issues the following statement:
If you put less than 20% down on a conventional mortgage, you’ll have to pay what’s called private mortgage insurance (PMI). It’s a compensation to the lender for taking a chance on a borrower with a lower down payment. But once your loan-to-value ratio dips below 78% your lender will stop adding PMI charges to your monthly mortgage payment. And if you put 20% down, you’ll never have to pay PMI. FHA mortgages, on the other hand, all come with mortgage insurance. When you take out an FHA mortgage you’ll pay an up-front mortgage premium, plus a monthly premium. If you put less than 10% down on your FHA mortgage, that monthly mortgage insurance premium will stay on your mortgage bill for the length of your loan, no matter how much equity you build up.
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
- 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
- Fannie and Freddie are the institutions that set conforming lending guidelines
- Conventional loans allow for one to four unit single family home purchases
- It also offers 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
- This holds true if and 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 Versus Conventional Mortgages With Student Loans
Borrowers with high student loan balances may need to go with conventional loans.
- Fannie Mae and Freddie Mac accepts Income-Based Repayment on federal outstanding students loans
- HUD does not accept IBR Payments on student loans
- HUD requires 1.0% of outstanding loan balance be used as hypothetical debt when calculating debt to income ratios of borrowers
- Conventional Loans allow IBR Repayments on student loans as long as it reports to all three credit bureaus
Government And Conventional Loans After Bankruptcy And Housing Event
HUD 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
- 4 years after a deed in lieu and/or short sale for Fannie Mae and Freddie Mac
- Fannie Mae and Freddie Mac require a four-year waiting period after a short sale to qualify for Conventional Loan
- There is a seven-year waiting period after the recorded date of standard foreclosure to qualify
- Mortgage interest rates do 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
- 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 is 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 require 10% down payment on second home financing
- 20% down payment for investment properties.
- Gustan Cho Associates offers NON-QM Loans as well as other loan programs