This guide covers the pros and cons of Conventional and FHA loans. The pros and cons of Conventional and FHA loans depend on each individual mortgage borrower. There are situations where borrowers will qualify for Conventional loans but not FHA loans.
If a home buyer had a previous Chapter 7 Bankruptcy with a mortgage part of Chapter 7 Bankruptcy, there is a four year waiting period from the discharged date of the bankruptcy.
The date of the foreclosure or short sale does not matter. However, with FHA loans, if the homeowner had a mortgage part of the Chapter 7 Bankruptcy, there is a three year waiting period after the recorded date of the foreclosure which is past the discharged date of the bankruptcy. It can take years for the deed to get transferred out of the borrowers’ name. Once that deed is transferred out, that is the date where the 3-year waiting period starts on FHA loans.
What Are FHA Loans
The Federal Housing Administration has a phenomenal loan program for home buyers. FHA mortgages are very popular among home buyers and those who are refinancing their homes. HUD, the parent of FHA, made home ownership possible to almost every working American and their families. The minimum credit scores required for a 3.5% down payment FHA loan is 580 FICO. Under 580 credit score borrowers with scores down to 500 FICO can qualify with 10% down payment.
The Pros and Cons of FHA and Conventional Loans
The criteria to qualify for an FHA loan is much leaner than those that apply to conventional financing. Current mortgage rates for FHA mortgage loans are lower than conventional current mortgage rates. A borrower can qualify for an FHA loan with much lower credit scores than conventional loans. A home buyer only needs to have a 3.5% down payment plus closing costs to buy a home with an FHA Loan. The home buyer can request a seller’s concession of up to 6% from the seller to assist or cover all closing costs. Part of the 3.5% down payment does not have to be all of your own funds. Home buyers can get a gift from relatives or family members for all or part of the down payment but would need a gift letter as well.
Credit Criteria Less Strict on FHA Loans
FHA also has more lenient requirements for home buyers when it comes to borrower’s credit. For those borrowers who have filed bankruptcy, FHA has a two-year waiting period prior for them to apply. Whereas it is much longer when it comes to conventional financing. The two-year waiting period needs to be two years from the date of the discharge of the bankruptcy and not the date it was filed. For those borrowers who had a foreclosure, FHA requires a minimum of a 3-year waiting period for the borrower to be able to apply for a home mortgage loan application.
Waiting Period After Foreclosure on FHA Loans
The 3 year waiting period after a foreclosure is 3 years from the date of the sheriff’s sale or the date where the title of the foreclosed home was transferred out of your name to the bank’s name. This is a very important factor in calculating the starter date. Many homeowners who had a deed in lieu of foreclosure think that the date of them giving up ownership of the home is the date they turned their keys into their lender. That is not always the case. Many lenders did not transfer ownership out of the borrower months, or sometimes, years after they accepted the keys. If this is the case, the foreclosed homeowner would be at a major disadvantage because the clock does not start until the deed of the house is transferred.
There are folks who have turned their keys into their lender 3 years ago but the deed is still not transferred out of their names so the start clock for the 3 year wait period did not even start.
To find out when the deed was officially transferred out of your name, you can check the county recorder’s office and this can be done online. One of the disadvantages of having an FHA versus a conventional loan is that with an FHA loan, a borrower needs to pay a 1.75% Upfront Mortgage Insurance Premium. On a $200,000 house, the Upfront Mortgage Insurance Premium alone is $3,500. This is a one time FHA insurance premium that goes to help fund the FHA insurance program. FHA also requires monthly insurance premiums to be charged on your FHA mortgage. This monthly mortgage insurance premium is calculated as 0.55% of your mortgage and dividing it by 12 months.
The Pros and Cons of Conventional and FHA Loans: Mortgage Insurance Premium
On a $200,000 FHA mortgage loan, the monthly mortgage premium will be calculated as follows:
- $200,000 (Mortgage Loan Amount ) x 0.055% (0.55% Factor ) = $1,100 is the annual FHA mortgage insurance premium
- Monthly HUD mortgage insurance premium will be the annual FHA mortgage insurance premium and dividing it by 12 months
- $91.66 will be monthly insurance FHA mortgage insurance premium
- Home buyers need to add this figure into the monthly mortgage payment
There is no monthly mortgage insurance payment on a conventional loan with 20% down payment. However, home buyers who put less than 20% down payment on a conventional loan are required to have private mortgage insurance, also known as PMI.
Mortgage Insurance Premium on FHA Loans
Why doesn’t everyone just go with an FHA mortgage then? The reason being is because the private mortgage insurance premium is much lower than the FHA mortgage insurance. Normally, private mortgage insurance is half the amount than that of FHA mortgage insurance. Even though a borrower might have a lower mortgage interest rate with an FHA loan, the borrower can have higher mortgage payments every month with an FHA Loan than a conventional mortgage with a higher interest rate. This is because of the higher FHA monthly mortgage insurance.
The Pros and Cons of Conventional and FHA Loans: Benefits Conventional Loans
With Conventional mortgage loans, there is no upfront mortgage insurance premium when purchasing a new home. So a borrower would not have to pay the $2,500 upfront mortgage insurance. Borrowers with high student loan balances may need to opt for conventional versus FHA loans. Conventional loans accepts Income-Based Repayment that reports on credit reports. HUD requires 1% of the outstanding student loan balances to be used as a monthly hypothetical debt if the payment is not fully amortized.
Fannie Mae Guidelines on Conventional Loans
The pros and cons of Conventional and FHA loans are that FHA is much more lenient when it comes to qualifying for a home loan after bankruptcy or foreclosure. The waiting period for Conventional loans after a homeowner filed bankruptcy is normally a minimum of 4 years if not longer depending on the lender.
The waiting period for Conventional loan after a foreclosure is normally a minimum of 7 years after the recorded date of foreclosure. The waiting period is four years after a short sale or deed-in-lieu to qualify for Conventional loans.
The pros and cons of conventional and FHA loans depends on the individual borrower. The pros and cons of Conventional and FHA loans are that both loan programs require a low down payment on owner occupant mortgages. If you have any questions, please contact me via email or phone. Our email address is gcho@gustancho.com. Our number is 800-900-8569. Text us for faster response. We will be happy to see which program best benefits you.
