This BLOG On Reason Using Conventional Versus FHA Loans By Home Buyers Was PUBLISHED On August 19th, 2019
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 is 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
In this blog, we will discuss the reason 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
We will cover the main Reason Using Conventional Versus FHA Loans By Home Buyers in this blog. Here are the most common Reason Using Conventional 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 balance 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 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 using Conventional Versus FHA Loans.
Non-Occupant Co-Borrowers Not Related To Main Borrowers May Be Reason Using Conventional Versus FHA Loans
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 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
Borrowers who had a prior mortgage included in bankruptcy has 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 requirement in qualify for an FHA Loan from the recorded date of the foreclosure, deed in lieu of foreclosure, and/or short sale
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