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.

Buying A House With A Conventional Loan

Two of the most popular mortgage loan programs today in the United States are FHA Loans and Conventional Loans.

• HUD which is the United States Department of Housing and Urban Development is the parent of the Federal Housing Administration which is known by many as FHA
• FHA is a government agency and is not a mortgage lender
• FHA’s mission and purpose is not to originate or fund FHA insured mortgage loans
• Its purpose is to insure mortgage loans that are originated and funded by approved banks and lenders
• FHA insures lenders in the event borrowers defaults on their FHA Loans
• In order for HUD to insure FHA Loans, lenders need to be HUD approved and each mortgage loan needs to meet FHA Guidelines
• FHA Guidelines is listed on HUD 4000.1 FHA Handbook
• HUD 4000.1 Handbook is over 800 pages of rules and regulations on FHA mortgage lending guidelines
• HUD Guidelines change and the changes is updated by HUD through mortgagee letters as changes comes up
• FHA will not insure FHA Loans where lenders did not follow HUD Guidelines

The Main 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 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 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

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.

Buying A House With A Conventional Loan Due To Guidelines

FHA Loans are not available for second home financing and investment home financing.

• FHA Loans are only for owner occupant primary home financing only
• Conventional Loans allows for second home financing and investment property financing
• In general, FHA loans have less stringent mortgage lending requirements than Conventional Loans
• HUD requires a minimum of 580 FICO credit scores versus 620 FICO credit scores required for Conventional Loans
• Maximum debt to income ratios permitted with FHA Loans is 56.9% DTI versus 50% DTI with Conventional Loans
• There is a two year waiting period to qualify for an FHA Loan after a Chapter 7 Bankruptcy discharged date with an FHA Loan versus a four year waiting period with Conventional Loans
• There is a three-year waiting period to qualify for FHA Loan after a foreclosure, deed in lieu of foreclosure, and short sale
• There is a four year waiting period after a short sale and/or deed in lieu of foreclosure to qualify for a Conventional Loan
• There is a seven-year waiting period to qualify for a Conventional Loan after a foreclosure

If you have a Chapter 13 Bankruptcy discharge, there is no waiting period after a Chapter 13 Bankruptcy discharged date to qualify for an FHA Loan.  Borrowers can qualify one year into their Chapter 13 Bankruptcy with FHA Mortgages. There is a two-year mandatory waiting period to qualify for a Conventional Loan after a Chapter 13 Bankruptcy discharged date and four-year waiting period after Chapter 13 dismissal date.

Buying A House With A Conventional Loan Due To Mortgage Part Of Bankruptcy

Home Buyers who had a mortgage or multiple mortgages as part of their Chapter 7 Bankruptcy can now qualify for a Conventional Loan four years from the discharged date of their Chapter 7 Bankruptcy discharged date:

• This holds true even though the foreclosure that was part of their Chapter 7 Bankruptcy was recorded at a later date
• As long as their foreclosure has been finalized after the Chapter 7 Bankruptcy discharged date, the waiting period is four years from the date of the Chapter 7 Bankruptcy discharged date
• Borrowers cannot have reaffirmed the mortgage after bankruptcy

This is not the case with FHA Loans.

Home Buyers Buying A House With A Conventional Loan Due To Mortgage Rates

Mortgage Rates on Conventional Loans are generally higher than mortgage interest rates on government loans.

• Government Loans such as FHA Loans,  VA Loans, USDA Loans are backed and insured by the government entity against the default of borrowers
• Fannie Mae and Freddie Mac does not guarantee Conventional Loans against borrowers defaulting on Conventional Loans
• All Conventional Loans that have higher than 80% loan to value are required to have private mortgage insurance
• Private mortgage insurance is what guarantees the mortgage lender in the event if  borrower defaults on their mortgages
• Borrowers who put a down payment of at least 20% down payment, there is no private mortgage insurance required on conforming loans
• Mortgage Rates on Conventional Loans depends on the borrower’s credit scores and the amount of down payment the home buyer puts down on their home purchase

To get the best Conventional Mortgage Interest Rates, borrowers should have at least a 740 FICO credit score and have a 20% down payment. Prior bad credit or a prior bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale has no bearing or impact on a borrower’s mortgage rates.

Buying A House With A FHA Loan With Prior Bad Credit

HUD understands that borrowers may have had prior bad credit due to unemployment, loss of business, medical reasons, divorce, or other extenuating circumstances. Many people will experience the flow of their income get interrupted where it affected them not to be able to make their monthly debt payments on time where it affected their credit. FHA does not require borrowers to pay off outstanding unpaid collection accounts with balances and/or charge off accounts. Borrowers can still qualify for an FHA loan without having to pay off any outstanding collection accounts.

Buying A House With A FHA Loan With Outstanding Collections And Late Payments

HUD does understand Borrowers that went through financial hard times and have bad credit and lower credit scores as well as outstanding unpaid collection accounts as well as charged off accounts. However, having prior bad credit and outstanding unpaid collection accounts and charge-off accounts in the past is different than having recent bad credit and recent late payments. HUD wants to see that all borrowers have been timely with all of their monthly debt payments in the past 12 months. HUD really frowns upon the fact if Borrowers has had late payments after a bankruptcy, foreclosure, deed in lieu of foreclosure, and short sale.

Buying A House With A FHA Loan: Bankruptcy And Foreclosure

Home buyers who had a prior bankruptcy and/or foreclosure can become eligible to purchase a home with an FHA Loan two years after a bankruptcy:

• The waiting period is three years after a foreclosure, deed in lieu of foreclosure, or short sale with re-established credit to qualify for FHA Loans
• Again, minimum credit scores to qualify for an FHA Loan after bankruptcy and foreclosure is 580 credit scores
• 3.5% down payment is required
• Lenders do not want to see any late payments after bankruptcy, foreclosure, deed in lieu of foreclosure, and short sale
• Re-established credit is required
• Lenders want to see timely payments in the past 12 months

Buying A House With A FHA Loan: FHA Loan After Chapter 13 Bankruptcy

There is no waiting period to qualify for an FHA loan after a Chapter 13 Bankruptcy discharge date. However, if the Chapter 13 Bankruptcy discharge has not been discharged for at least 2 years, then all FHA loans after a Chapter 13 Bankruptcy discharge are all manual underwriting. All manual underwriting FHA loans require verification of rent. Verification of rent is only valid if the renter can provide 12 months of timely canceled checks and/or 12 months of timely online bank statements payments to the landlord

Bankruptcy And Foreclosure Mortgage Guidelines

With FHA Loans, if you had a mortgage or mortgages as included in Chapter 7 Bankruptcy, the following guidelines apply:

• There is a three year waiting period from the recorded date of the foreclosure and/or date of the sheriff’s sale of the property that the mortgage note was included in the Chapter 7 Bankruptcy
• Many mortgage lenders are in no major hurry to change the deed out of the borrowers’ name into their name
• Many folks who had a mortgage or mortgages as part of their Chapter 7 Bankruptcy are left in a situation where their waiting periods did not even start yet
• This is because the deed has not transferred out of their names yet
• This new Fannie Mae Guidelines On Mortgage Part Of Bankruptcy opens up many doors for homebuyers who had a mortgage part of their bankruptcy but the foreclosure was not recorded at a much later date

For more information about the content in this blog or other mortgage-related topics, please contact us at Gustan Cho Associates at 800-900-8569 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.