Mortgage Guidelines On Conventional Versus FHA Loans

Mortgage Guidelines On Conventional Versus FHA Loans

This BLOG On Mortgage Guidelines On Conventional Versus FHA Loans Was UPDATED On October 4th, 2018

Mortgage Guidelines On Conventional Versus FHA Loans are different.

  • There are times where a home buyer may need to go with a Conventional versus FHA Loans
  • One of the biggest reasons why a home buyer needs to go with a Conventional versus a FHA Loan is when they need a higher mortgage loan limit than the standard FHA Loan Limit at $294,515
  • Unless the property buyers are purchasing is located in a high cost area that is classified as a high cost area by HUD, the maximum FHA Loan Limit in most areas in the United States is capped at $294,515
  • Chicago and its surrounding suburbs of Will County, Lake County, Cook County, McHenry County, Kane County, and DuPage County have higher FHA Loan Limits and are capped at $365,700

Mortgage Guidelines On Conventional Versus FHA Loans In California

Many areas of California are classified as high cost areas and have FHA Loan Limits of $679,650:

  • California has one of the highest home prices in the nation
  • Average mortgage loans in the United States is $200,000
  • However, in California, average residential mortgage loans average $400,000
  • Miami-Dade County, Palm Beach County, and Broward County are counties of Florida where the FHA Loan Limits are much higher than the rest of the state of Florida
  • HUD, the United States Department of Housing and Urban Development, is the parent of the Federal Housing Administration or FHA
  • HUD sets the FHA Loan Limits
  • FHA Loan Limits can change without extended notice by FHA and often does
  • HUD can either increase or decrease the FHA Loan Limits in all areas of the United States
  • For home buyers who need a higher mortgage loan limit than the FHA Loan Limits, then they may have to opt to go with a Conventional Loan

Conforming Loan Limit Mortgage Guidelines On Conventional Versus FHA Loans

Fannie Mae and Freddie Mac are the two mortgage giants that set the Conventional Loan Limits throughout the United States:

  • Unless the county is classified as a high cost area, Fannie Mae and Freddie Mac maximum conforming loan limits is capped at $453,100
  • Many home buyers who need a higher loan limit than the standard FHA Loan Limit Cap of $294,515 will need to go with a Conventional versus a FHA insured mortgage home loan

Updated Mortgage Guidelines On Conventional Versus FHA Loans

Conventional Loan Programs have tougher mortgage lending requirements than FHA Loans.

  • Fannie Mae and Freddie Mac require a minimum credit score of 620 FICO Credit Score Versus FHA requiring a minimum of a 580 FICO Credit Score to qualify for a FHA insured home mortgage loan
  • Conventional Loans have a maximum debt to income ratio requirements of 50% DTI
  • FHA will allow up to a 56.9% back end DTI to qualify for a FHA insured home mortgage loan
  • Down payment requirements for Conventional Loans is normally 5% down payment unless you are a first time home buyer then a 3% down payment  on home purchase will do under Fannie Mae Guidelines
  • Freddie Mac will allow 3% down payment conventional loan programs if the home buyer has not had any interest in a home ownership in the past three years
  • FHA only requires a 3.5% down payment on a home purchase as long as borrower’s credit scores are at least 580 FICO

Mortgage Guidelines On Conventional Versus FHA Loans And Credit Scores

Conventional Loans are extremely sensitive to credit scores and loan to value unlike FHA Loans.

  • All FHA Loans are insured by the Federal Housing Administration against borrower default
  • Lenders knows that they are lower risk than conventional loans
  • In the event if Borrower defaults on their mortgage loan, HUD will insure the Borrower’s FHA Loan
  • FHA Loans have much lower interest rates than Conventional Loans
  • This holds true as long if credit scores are at least 680 credit scores, borrowers will get the best available interest rates
  • However, that is not how it works with Conventional Loans
  • With Conventional Loans, mortgage rates depends on credit scores and the amount of down payment you put on your home purchase
  • To get the best available conventional mortgage interest rates, borrower needs a credit score of at least a 740 credit score and have at least 25% down payment
  • With FHA Loans, mortgage rates will be the same whether you put 3.5% down payment or 25% down payment
  • This is because FHA Loan is insured by the government against default

Mortgage Guidelines On Conventional Versus FHA Loans On Waiting Period On Mortgage Part Of Bankruptcy

There are mandatory waiting periods after a foreclosure and short sale to qualify for both FHA and Conventional Loans.

  • For FHA Loans, there is a two year mandatory waiting period to qualify for a FHA Loan after a Chapter 7 Bankruptcy discharged date
  • Those who are into a Chapter 13 Bankruptcy repayment plan, they can qualify for a FHA Loan one year into the Chapter 13 Bankruptcy repayment plan
  • This holds true as long as they have the Chapter 13 Bankruptcy Trustee approval
  • Borrowers need to provide timely payments of all of their creditors for the past 12 months and verification of rent
  • Those who just had a Chapter 13 Bankruptcy discharge, there is no waiting period after the Chapter 13 Bankruptcy discharge
  • There is a three year mandatory waiting period to qualify for a FHA Loan after a short sale, foreclosure, or deed in lieu of foreclosure
  • If you had a mortgage part of Chapter 7 Bankruptcy, the waiting period is three years from the date when the foreclosure was recorded on the county public records after the Chapter 7 Bankruptcy discharged date

Case Scenario If Borrower Had Prior Mortgage Included In Bankruptcy

Here is a case scenario:

  • if you had a mortgage included in Chapter 7 Bankruptcy back in January 2010
  • and foreclosure was not recorded until January of 2016
  • borrower will not qualify for a FHA Loan until three years from the January 2016
  • waiting period start date is January 2019 even though Chapter 7 Bankruptcy discharged date was January 2010 and your mortgage was part of your Chapter 7 Bankruptcy discharge

For conventional loans, it is different:

  • there is a four year waiting period to qualify for a conventional loan after a Chapter 7 Bankruptcy discharged date
  • There is a two year waiting period to qualify for a Conventional Loan after the Chapter 7 Bankruptcy discharged date
  • There is a four year waiting period to qualify for a conventional loan after a short sale and/or deed in lieu of foreclosure
  • There is a seven year waiting period to qualify for a conventional loan after a foreclosure

Borrowers with a mortgage part of your Chapter 7 Bankruptcy, there is a four year waiting period to qualify for a conventional loan after the discharge date of your Chapter 7 Bankruptcy discharged date. The foreclosure can be recorded at a later date unlike FHA Loans.

Those who had a mortgage as part of their Chapter 7 Bankruptcy discharge may be eligible to qualify for a conventional loan faster than a FHA Loan. This holds true because with conventional loans, the waiting period clock starts on the discharged date of the Chapter 7 Bankruptcy for those who had a mortgage as part of their Chapter 7 Bankruptcy. Please contact us at Gustan Cho Associates at Loan Cabin Inc. at 262-716-8151 or text us for faster response. Or email us at gcho@loancabin.com. We are direct lenders with no overlays on government and conventional loans.

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