Difference Between Conventional Versus FHA Loan Guidelines
In this article, we will cover the difference between Conventional versus FHA loan guidelines. We will discuss the differences between Conventional versus FHA loan for borrowers. Borrowers may benefit from one loan program over the other. Each case will need to be evaluated on an individual case-by-case basis. There have been changes with Conventional versus FHA loan. We will explain the advantages and disadvantage between getting a Conventional versus FHA loan and which mortgage loan option is best for you.
Just until recently, only conventional loans allowed Income-Based Repayment (IBR). HUD, the parent of FHA has updated their student loan guidelines and now allow IBR Payments on FHA loans. FHA loans have higher debt-to-income ratio cap of 46.9% front-end and 56.9% back-end DTI versus 50% on conventional loans. There is no front-end debt-to-income ratio cap on conventional loans.
There are positive changes with Fannie Mae and Freddie Mac where borrowers need to go with a conventional versus FHA loan. When a consumer has a mortgage part of bankruptcy where the waiting period on foreclosure will start from the discharged date of the Chapter 7 Bankruptcy discharged date and not the actual recorded date of the foreclosure with Conventional loans.
Down Payment Guidelines on Conventional Versus FHA Loan
Down payment requirement for first-time homebuyers is 3% down payment on conventional versus FHA loan down payment requirement of 3.5%. First-time homebuyer is a buyer who did not have an ownership in a home in the past three years. In the following paragraphs, we will discuss and cover Conventional versus FHA loan guidelines.
With case situations like having a prior mortgage included in a bankruptcy, a home buyer will qualify for a Conventional Loan but will not qualify for an FHA loan. This holds true because, with FHA, the waiting period starts from the recorded date of the foreclosure or the sheriff’s sale after the Chapter 7 Bankruptcy discharged date.
The minimum credit score to qualify for a 3.5% down payment home purchase FHA loan is 580 credit scores. Homebuyers with credit scores down to 500 FICO can qualify for an FHA loan. However, if your credit score is under 580 FICO, HUD requires you to put a 10% down payment for an FHA loan versus a 3.5% down payment. 3% down payment for first-time homebuyers. A First-time homebuyer is defined as a buyer who did not have ownership in a home for the past three years. Otherwise, the down payment requirement is 5% for seasoned homebuyers on conforming loans. The minimum credit score required to qualify for a Conventional loan is 620 credit scores.
Minimum Credit Score Requirements on Conventional Versus FHA Loan
As mentioned earlier, the minimum credit score to qualify for a 3.5% down payment FHA home loan is 580. Borrowers can qualify for an FHA loan with credit scores of under 580 FICO credit scores. The lowest credit score you can have to qualify for an FHA loan is 500 FICO.
For borrowers with credit scores between 500 credit scores and 579 credit scores, a 10% down payment are required under HUD Guidelines. To qualify for a Conventional loan, Fannie Mae and Freddie Mac both require borrowers to have at least a 620 credit score.
Credit Scores do have an impact on mortgage rates. Credit scores have more of an impact with Conventional versus FHA loan. FHA loans are insured by HUD. HUD, or the United States Department of Housing and Urban Development, is the parent of FHA. HUD is not a mortgage lender. HUD is a governmental entity that insures FHA loans that are originated and funded by approved lenders in the event the borrower defaults on their FHA loan.
How Loan-To-Value Affect Rates on Conventional Versus FHA Loan
Loan-to-value is calculated by taking the mortgage balance dividing it by the value of the home. That number derived is called the loan to value. The more down payment the home buyer puts down on their home purchase, the lower the loan to value.
Loan-to-value affects mortgage rates on Conventional loans but not on FHA loans. This is because the government insures lenders against the borrower defaulting on their FHA loan.
Fannie Mae and Freddie Mac, the two mortgage giants who set up the mortgage lending guidelines on Conventional loans. There is no government guarantee on Conventional loans against borrower default. So the more down payment borrowers put down on their home purchase, the less risky it is for lenders.
Mortgage Rates on Conventional Versus FHA Loan
To get the best conventional mortgage rates, borrowers need to have credit scores of higher than 740 credit scores and a down payment of 25% down payment on their home purchase.
Higher credit scores and larger down payment means less risk for lenders and less risk. That translates to lower mortgage rates. With FHA Loans, credit scores do play an impact on mortgage rates but not as much. As long as the borrower has a 680 FICO credit score, the borrower will get the best mortgage rates.
Down payment has no impact on mortgage rates on FHA loans. This holds true since the loan is guaranteed by HUD, unlike Conventional Loans where they do not have a government guarantee.
Mortgage Insurance Guidelines on Conventional Versus FHA Loan
Conventional lenders do require private mortgage insurance from third-party mortgage insurance companies for all borrowers who have less than a 20% down payment. HUD requires FHA annual mortgage insurance premium from all borrowers throughout the term of the 30-year fixed-rate mortgage loan. With FHA loans, there is a one-time upfront mortgage insurance premium of 1.75% which is charged to all borrowers. This upfront FHA MIP can be rolled into the FHA loan balance.
Conventional Versus FHA Loan Debt-To-Income Ratio Guidelines
Every mortgage loan program has its own debt-to-income ratio guidelines. The borrower’s debt-to-income ratio is one of the most important factors when it comes to qualifying for a mortgage loan. Debt-to-income ratios also referred to as DTI, is the total amount of the minimum monthly debt payments a borrower has divided by the borrower’s monthly gross income. That number is the debt to income ratio.
There is no maximum front-end debt-to-income ratio requirement on conventional loans. Conventional loans only have a maximum 5o% back-end debt-to-income ratio cap.
The maximum debt-to-income ratio allowed per Fannie Mae is 50% DTI to qualify for a conventional loan. HUD, the parent of FHA, allows a maximum debt to income ratio of up to 46.9% front end 56.9% DTI back end for borrowers with credit scores of 620 and higher.
What Is The Advantage of a Conventional Versus FHA Loan?
In general, for borrowers with under 620 credit scores, it will be difficult to get an approve/eligible with a 46% front-end and 56.9% back-end debt-to-income ratio.
HUD’s AUS algorithm takes the lower credit scores as higher risk, therefore, the debt-to-income ratio may get reduced to 31% front-end and 43% back-end DTI unless the borrower has strong compensating factors.
If borrowers show strong compensating factors and reserves, borrowers with under 620 credit scores, the AUS can get an approve/eligible per automated underwriting system with a maximum of 46.9% front-end and 56.9% back-end debt to income ratio.
Non-Occupant Guidelines on Conventional Versus FHA Loan
HUD allows non-occupant co-borrowers to be added to the mortgage loan of the main borrower. This holds true as long as the non-occupant co-borrower is related to the borrower by marriage, blood, or marriage. Fannie Mae does allow non-occupant co-borrowers to be added on a Conventional loan.
With Conventional loans, non-occupant co-borrowers do not have to be related to main borrowers. Freddie Mac also allows non-occupant co-borrowers to be added and they do not have to be related to main borrowers.
HUD allows non-occupant co-borrowers to be added who are not related to main borrowers by blood, law, marriage. However, a 25% down payment versus a 3.5% down payment is required.
Seller Concessions Guidelines on Conventional Versus FHA Loan
HUD requires a 3.5% down payment on a home purchase for borrowers with at least a 580 credit score. Homebuyers with under 580 FICO credit scores can qualify for an FHA loan. But any borrowers with credit scores between 500 and 579 FICO, a 10% down payment is required on a home purchase. HUD allows up to a 6% seller concession from the home seller to contribute towards the home buyer’s closing costs. USDA loans allow up to a 6% seller concession from the home seller. VA loans will allow up to a 4% seller concession.
Seller concessions can only be used for closing costs and not for the down payment on a home purchase. Any overages with the seller concessions need to go back to the home seller. The home seller cannot give a cash kickback to the home buyer with the seller’s concessions overages.
Fannie Mae and/or Freddie Mac allow up to 3% seller concessions by a seller to contribute to home buyers closing costs on primary residence purchases. Investment homes can have up to 2% seller concessions.
Cash-To-Close on Conventional Versus FHA Loan
Fannie Mae will allow a 3% down payment on a home purchase for first-time homebuyers: However, the home buyer needs to be a first time home buyer. Regular home buyers require a 5% down payment on a home purchase.
Freddie Mac allows homebuyers who have not owned a home for the past 3 years a 3% down payment home purchase. If the home buyers are seasoned home buyers, then a 5% down payment is required.
Fannie Mae and Freddie Mac will allow up to a 3% seller concessions by the home seller to contribute for homebuyers closing costs for primary owner occupant home purchases and second home purchases. Homebuyers who had an ownership interest in a home in the past three years need to put a 5% down payment on an owner-occupied primary home conventional loan.
Maximum Seller Concession Guidelines on Conventional Versus FHA Loan
There is a maximum seller concession home sellers can offer homebuyers. The maximum seller concession a home seller can offer a homebuyer on an owner-occupant primary residence home on a conventional loan is 3%. Seller concessions will be limited to 2% seller concessions for investment properties.
If the homebuyer is short of coming up with closing costs even with seller concessions, the mortgage company can contribute a lender credit to cover closing costs in lieu of a higher mortgage rate.
Any overages with the seller’s concessions need to go back to the home seller. The home seller is not allowed to give any kickbacks to the home buyer with seller concession overages. Seller concessions can only be used for closing costs and not for the down payment on a home purchase. HUD allows home sellers to contribute up to a 6% seller concession towards the homebuyer’s closing costs.
