Reason Using Conventional Versus FHA Loans By Home Buyers

This Article Is About Reason, Using Conventional Versus FHA Loans By Home Buyers

FHA and Conventional Loans are the two most popular loan programs in the United States.
FHA Loans are very popular due to the 3.5% down payment requirements and for borrowers with lower credit scores. To qualify for FHA Home Loans with 3.5% down payment, a borrower needs a minimum credit score of 580 FICO. Borrowers under 580 FICO and down to 500 credit scores can qualify for FHA Loans with 10% down payment. FHA, VA, USDA Loans are government-backed loans. What this means is if the borrower defaults on a government-backed loan, the federal agency backing the loan will partially insure the loss to the lender. Due to this government guarantee, lenders can offer government loans with little to no down payment at very competitive mortgage rates. Conventional Loans are not government-insured. Conventional Loans are often referred to as conforming loans. The reason Conventional Loans are referred to as conforming loans is that they need to conform to Fannie Mae and/or Freddie Mac Guidelines. Fannie Mae and Freddie Mac will not purchase mortgages that conform to their mortgage guidelines. The minimum credit scores required to qualify for a conventional mortgage is 620 FICO.
The reason for using Conventional Versus FHA Loans by home buyers. There are times home buyers need to use Conventional versus FHA Loans.

The Main Reason, Using Conventional Versus FHA Loans By Home Buyers

Which means using conventional loans versus FHA loans by home buyers

Borrowers with a large outstanding student loan balance. Borrowers in community property states.
Borrowers with non-occupant co-borrowers who are not related to the main borrower by law, marriage, blood. Homebuyers with higher loan limits than the maximum FHA Loan Limit allowed. Homebuyers with a prior mortgage that was included in bankruptcy. We will cover the above bullet points in detail in the following paragraphs.

High Student Loan Balance Is Top Reason Using Conventional Versus FHA Loans

Income-Based Repayment (IBR) is allowed on Conventional Loans but not FHA Mortgages.
Borrowers with high student loan balances may need to go with Conventional Loans versus FHA Mortgages. FHA requires 1% of the outstanding balance to be used as a hypothetical debt when underwriters are calculating debt to income ratio. Deferred student loans are not allowed for both FHA and Conventional Loans. Both loan programs allow for fully amortized monthly payments over an extended term.

Non-Borrowing Spouse Is The Reason, Using Conventional Versus FHA LoansNon-Borrowing Spouse Is The Reason Using Conventional Versus FHA Loans

There are 9 community property states in the United States. With FHA Loans, the debts of the non-borrowing spouse are included when mortgage underwriters calculate debt to income ratios of borrowers. If the main borrower is married, the spouse’s debt will be included when calculating debt to income ratios on FHA Loans. This holds true even though the spouse is not on the loan. This rule does not apply to Conventional Loans. With Conventional Loans, the debts of the non-borrowing spouse are excluded from the debt to income ratio calculations of the main borrower. If the non-borrowing spouse has a lot of debts, this may be a reason for using Conventional Versus FHA Loans.

Non-Occupant Co-Borrowers Not Related To Main Borrowers

Both FHA and Conventional Loans allow for Non-Occupant Co-Borrowers to be added for borrowers who exceed the maximum debt-to-income ratio guidelines. With FHA, the non-occupant co-borrower needs to be related to the main borrower by law, marriage, blood in order to qualify for a 3.5% down payment FHA Loan. If the non-occupant co-borrower is not related by blood, marriage, law, then HUD requires borrowers to put a 25% down payment on home purchases on FHA Loans. Fannie Mae and Freddie Mac allow non-occupant co-borrowers to be added to the main borrower on conventional loans.
However, Fannie Mae and Freddie Mac do not require non-occupant co-borrowers to be related to the main borrower on Conventional Loans.

Loan Limits May Be Reason, Using Conventional Versus FHA Loans

HUD maximum loan limit on FHA Loans is $314,827 in traditional areas. Conventional Loan Limits is capped at $483,350. Loan Limits on FHA and Conventional Loans are higher in high-cost areas. Many times if home buyers need to exceed the FHA Loan Limit, they may need to use Conventional Financing versus FHA Loans.

Prior Mortgage Included In Bankruptcy

Which means a bankruptcy mortgage earlier

Borrowers who had a prior mortgage included in bankruptcy have a four-year waiting period after the discharge date of the bankruptcy on Conventional Loans. The date of the foreclosure does not matter.
The housing event does need to be finalized. The mortgage cannot be reaffirmed after the bankruptcy.
With FHA Loans, there is a three-year waiting period from the recorded date of the housing event in cases where the borrower had a prior mortgage included in the bankruptcy. Although the mortgage was included in the bankruptcy, HUD requires a three-year waiting period required to qualify for an FHA Loan from the recorded date of the foreclosure, deed in lieu of foreclosure, and/or short sale.

For more information about the content in this blog or other mortgage-related topics, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at gcho@gustancho.com. The Team at Gustan Cho Associates is available 7 days a week, evenings, weekends, holidays.

2 Comments
  1. Nikki Hatch

    Good morning,

    I am looking for some help. I have been doing research on alternative mortgages and your company popped up. I read different reviews and decided, what the heck I’ll give it a whirl.

    My husband recently had a short sale. There were some crazy circumstances surrounding our current situation. First, my husband’s son got sick and he was back and forth to a hospital 2 ½ hours away from where we live. Shortly after that, my husband was in a car accident and we had to buy a new car and acquire a car payment. Not too long after that my husband had a stroke and was out of work on disability while he recovered. He was still required to pay his 750.00 a month child support during that time. We unfortunately got behind on the mortgage. We tried working with the mortgage company and sent in all required paperwork several times then they just stopped contact. We made the very hard decision to just move out of the house and into a mobile home and stopped paying the mortgage. We hired an awesome realtor and after a year and a half, it finally sold in December of 2020. Short sale. My husband has since been back to work full time and I have gotten a raise and we are now ready to get out of this small space. I was able to get preapproved without his information because we didn’t think we could get a mortgage with his information because of the short sale, etc. He has been working on getting his credit score up and it is now at 620. Our current combined income is 110,000. So, having gone through all that my question is given the above circumstances is it even possible to get a mortgage? We currently have found 2 homes we are really interested in to get out of this small space we are in, both under 200,000. We live in a small town in Pennsylvania. Are you able to help us?

    Thank you so much in advance,

    Nikki Hatch

    1. Gustan Cho, NMLS 873293 says

      We can definitely help you with our non-qm loan program. What is your number so my Associate Michelle McCue can call you shortly.

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