Conventional Versus FHA Loans Mortgage Guidelines

Conventional Versus FHA Loans Mortgage Guidelines

In this blog, we will cover and discuss the conventional loan guidelines and do a comparison between conventional versus FHA loans. Conventional loan after a deed-in-lieu of foreclosure, and/or a short sale requires a mandatory 4-year waiting period. The waiting period on conventional loans after foreclosure is seven years versus a four-year waiting period after a deed-in-lieu or short sale.

Table of Contents

Conventional Versus FHA Loans on Waiting Period After A Housing Event

Conventional Loan and Housing Events
For borrowers who don’t know about a housing event, we will explain the three types of housing events: foreclosure, deed in lieu of foreclosure, short sale. Deed-in-lieu of foreclosure is an alternative to a foreclosure.

What Is A Deed In Lieu of Foreclosure?

The homeowners voluntarily surrender the deed of the home and hand over the keys to the house so to speak.  Normally you have this arrangement agreed to by the bank. If not, you will end up in a standard foreclosure.  Getting the bank to agree to a deed in lieu of foreclosure and/or a short sale will save 3 years from the seven-year waiting period of a foreclosure.

Conventional Versus FHA Loans on Waiting Period Start Date After Foreclosure and Short Sale

The waiting period start date is the date when the deed of the home is transferred out of your name to another owner’s name and/or to the lender. The waiting period after a short sale is four years from the date of the short sale.

Conventional Versus FHA Loans on Waiting Period After Short Sale

For short sales, the waiting period starts from the date of the short sale which is shown on the HUD Settlement Statement.  Up until 2014, You could get a conventional loan 2 years after a deed-in-lieu or short sale, with a 20% down payment. However, the guidelines on the two-year waiting period after a deed in lieu and/or a short sale are no longer allowed.

Conventional Versus FHA Loans on Bankruptcy and Foreclosure Guidelines

As mentioned earlier, according to Conventional Loan Guidelines, there is a 7 year waiting period after a foreclosure before you can obtain another conventional loan.  The waiting period starts once the deed is transferred out of the borrower’s name.  In theory, you can be out of your house for months or a year but until the deed is updated the clock hasn’t started.

Can I Qualify For Conventional Loans After Bankruptcy?

Borrowers can qualify for conventional loans after chapter 7 and Chapter 13  Bankruptcy. The waiting period requirement after Chapter 7 versus Chapter 13 Bankruptcy is different before you can get a conventional loan.

Conventional Versus FHA Loans on Waiting Period Requirements After Bankruptcy

If you have gone through a Chapter 7 bankruptcy, the waiting period is 4 years from the discharge date of the Chapter 7 bankruptcy.  On the other hand, there is only a 2 year waiting period after a Chapter 13 bankruptcy discharge date. The clock starts after the discharge date of the bankruptcy. There is a four-year waiting period after the Chapter 13 Bankruptcy dismissal date to qualify for conventional loans.

Conventional Versus FHA Loans on Down Payment Requirements

According to Fannie Mae and Freddie Mac Guidelines, the following are the down payment requirements on conventional loans. Primary Home Purchase is a 3% down payment to a 5% down payment on a home purchase. The 3% down payment is for first-time homebuyers only. A first-time homebuyer is defined as a homebuyer who never purchased a home or had no ownership of a home for the past three years.

Conventional Versus FHA Loans on Down Payment Requirements on Multi-Unit, Second Homes, and Investment Homes

Conventional Versus FHA Loans On Down Payment Requirements
2-Unit Property requires a 15% down payment on conventional loans. Conventional loan down payment requirements on a 3-4-Unit Property is a 25% down payment. Second-home buyers require a 10% down payment. Investment Property requires a 15% down payment or higher on conventional loans.

Conventional Versus FHA Loans on Credit Score Requirements

Conventional Loan For Bad Credit Guidelines requires a minimum FICO score of 620 in order to be considered for a loan.  With the 620 FICO score, you will need to ensure that you can put 5% down towards the purchase of your home.  Be aware that with a 5% down payment you will be required to pay PMI (private mortgage insurance) until your loan-to-value is 80% or less.

Conventional Versus FHA Loans: Which Loan Is Best For Me?

If you have decent credit scores, a sufficient down payment, lower debt to income ratio, and timely payments in the past twelve months you should qualify for a conventional loan. Conventional Loans are loans that abide by the guidelines set forth by Fannie Mae and Freddie Mac. Fannie and Freddie are the two GSEs or Government Sponsored Enterprises in charge of creating the guidelines for Conventional Loans.

Why Conventional Loans Are Called Conforming Loans?

Conventional Loans are also referred to as conforming loans. This is because they must conform to Fannie Mae or Freddie Mac agency guidelines in order for the loan to be approved, closed, and sold on the secondary market.

Down Payment Requirements on FHA versus Conventional Loans

Conventional Versus FHA Loans: Which Loan Is Best For Me?
After loans close and funds, mortgage lenders don’t keep the loans they close in-house. Lenders sell funded loans on the secondary mortgage market.  In recent years Conventional loans have tried to compete with FHA loans from a down payment standpoint. Fannie Mae and Freddie Mac launched the 3% down payment home purchase program for first-time homebuyers in direct response to FHA loans’ 3.5% down payment requirements.

Loan Limits on Conventional Versus FHA Loans

Conventional loan limits have been increasing every year for the past six years due to skyrocketing home prices. 2022 Conventional loan limit is $647,200 in median-priced areas and $970,800 in high-cost areas for single-family homes. There are different loan limits depending on the number of units and counties that are classified as high-cost areas.

Benefits of Conventional Versus FHA Loans

Conventional loan limits on a single-family home for 2022 are $647,200 versus the FHA loan limit cap of $420,680. High-balance FHA and conforming loans in high-cost counties are capped at $970,800 for single-family homes. As long as there isn’t another Great recession, home values should continue to rise. We may see loan limits increase every year or every couple of years going forward.

Shop and Compare Mortgage Options

Before we get into the requirements needed for a Conventional Loan, it is also a good place to start by looking at the different benefits conventional loans offer. Borrowers should compare their mortgage options on whether to go with a conventional loan or an FHA loan and make a decision based on which loan program is best for them. Just because Conventional loans don’t have the lenient guidelines as their government-insured counterparts doesn’t mean that a Conventional Loan can’t be a good loan choice for you.

The Benefits of Conventional Versus FHA Loans

Benefits of Conventional Versus
In the following paragraphs, we will go through the benefits of conventional loans. As mentioned earlier in this article, Conventional Loans offer second home and investment home financing where government loans do not.

3% Down Payment Requirement on Conventional Loans for First-Time Homebuyers

First-time homebuyers can benefit from the 3% down payment requirements on conventional loans versus FHA’s 3.5% down payment requirements. Historically Conventional Loans require a 3% down payment for first-time homebuyers. Fannie and Freddie classify a first-time homebuyer as a homebuyer who did not have any interest in homeownership in the past three years. Otherwise, a minimum of a 5% down payment is required on conventional loans.

Private Mortgage Insurance on Conventional Loans Can Be Cancelled Once the Loan to Value  hits 80% LTV

There is Private Mortgage Insurance or PMI included in your monthly mortgage payment for homebuyers who do not put a 20% down payment. However, private mortgage insurance can be canceled once the loan to value falls at 80% LTV or lower.

Private Mortgage Insurance Can Be Canceled on Conventional Loans Once LTV Falls 80% LTV or Below

Being able to cancel private mortgage insurance is a huge benefit on conventional loans, unlike FHA Loans which have a mortgage insurance premium requirement of 0.085% of the FHA loan amount for the term of the 30-year FHA loan. PMI automatically drops off Conventional Loans after LTV is below 80%.  PMI also decreases the lower your LTV is so someone with a 95% LTV will pay more per month than someone with an 85% LTV.

Mortgage Rates on Conventional Versus FHA Loans

Conventional Loan Guidelines Versus FHA Guidelines on Second and Investment Homes
Conventional loans directly reflect your creditworthiness. Mortgage rates on conventional loans adjust accordingly.  Unlike FHA loans that rarely change with credit scores and down payment, Conventional loans are more sensitive to credit scores and loan value when it comes to pricing mortgage rates. For example, a borrower with a 740 FICO and 20% down payment will get nearly the best rate possible.

How Credit Scores Impact Pricing on C0nventional Versus FHA Loans

Borrowers with a 640 FICO and 5% down payment will have loan level pricing adjustments due to the lower rates on conventional loans. Conventional mortgage rates will get adjusted accordingly to the risk.  This is where if you are a solid borrower with a high credit score and down payment, you are in great shape to receive one of the best rates available on conventional loans.

Conventional Loan Guidelines Versus FHA Guidelines on Second and Investment Homes

Conventional Loans differ from FHA loans by allowing loans to be used for both second homes and investment properties.  This is good for borrowers with the ability to afford multiple homes or borrowers who are investors.  Down payments required for second homes are 10%. Investment properties will require a 15%-20% down payment.

Conventional Loan Guidelines and Lending Requirements

If you’d like to see the details on the remaining Conventional Loan Guidelines, you can find them in the list below and as always, if there are any questions you should come across, please reach out to Loan Consultants at 844-275-2007 Text us for a faster response.

Conventional Loan Guidelines on Credit Score Requirements

Conventional Loan Guidelines On Debt-To-Income Ratio
Credit Score:  The minimum credit score required for a Conventional Loan is 620 FICO. However, you may run into lenders that require 640 or even 660.  These are known as lender overlays. Lender overlays are additional requirements put on borrowers by lenders.

Lender Overlays By Mortgage Lenders

Lenders have lender overlays because the lender doesn’t want to take on the risk of lending to minimum qualifications.  Loan Consultants can offer no lender overlays. We can definitely get deals done to the minimum FICO requirements.  Now 620 FICO may be the minimum. As mentioned earlier if you are looking for the best rates possible then you need to ensure you have at least a 740 FICO.

Conventional Loan Guidelines On Debt-To-Income Ratio

DTI Ratio varies depending on if you are going with a Fannie Mae program or a Freddie Mac program.  In the case of Fannie Mae, you are required to have a DTI ratio no higher than 45%.  For Freddie Mac loans you are required to have a DTI ratio that does not exceed 50%.  Backend DTI Ratios are calculated by taking the proposed mortgage payment and all other monthly debt obligations and dividing them by your gross monthly income.

Mortgage After Bankruptcy and Foreclosure

Bankruptcy and Foreclosure: There are many different waiting periods associated with the 2017 Conventional Loan Guidelines and how they treat derogatory items The list below will outline the different scenarios you can run into as a borrower.

  • Chapter 7 Bankruptcy: 4=year waiting period from the discharge date
  • Chapter 13 Bankruptcy: 2-year waiting period from the discharge date or a 4 year waiting period from the dismissal date
  • Short Sale: 4-year waiting period from the recorded date
  • Foreclosure: 7-year waiting period from the recorded date
  • Deed-In-Lieu of Foreclosure: 4-year waiting period from the recorded date.

Get Pre-Approved For A Conventional Loan Program Today

Get Pre-Approved For A Conventional Loan Program Today

FHA Versus Conventional Loans: Educated Decisions

If you are going to be looking for a mortgage in the near future, then this article on 2017 FHA Versus Conventional Loans is the right place for you to start.  We are going to go into details about both sets of loans and the guidelines that they enforce.  It is smart for prospective borrowers to do their homework on the various types of loans that are available to them in order to allow them to make the right decision on a loan program.  However, when dealing with Loan Consultants you will not be forced to make this decision on your own as we have professionals waiting to speak with you, evaluate your situation, and offer our opinions as to the options you are facing and what makes sense.

FHA Versus Conventional Loans: Oversight

Both sets of loans have regulation agencies that oversee the implementation of guidelines to ensure lenders have the proper guidelines in which to originate their loans and borrowers also have the materials that show them what it is going to take for them to get approved for the loan.
FHA Loans are overseen and insured by the FHA or Federal Housing Authority which reports up to HUD or the U.S. Department of Housing and Urban Development.  HUD releases a handbook entitled the HUD 4000.1 Handbook which is a large book that goes over all the rules and regulations that are involved with FHA Loans and most any situation that may arise.
Conventional Loans have 2 different regulatory entities that work together to create the guidelines needed to obtain their loans and they are Fannie Mae and Freddie Mac.  These 2 are both GSE’s or Government Sponsored Enterprises which develop and enforce the guidelines needed for Conventional Loans.  Conventional Loans are also called Conforming Loans since they must conform to Fannie Mae and Freddie Mac guidelines.

FHA Versus Conventional Loans: Credit Scores

One of the most important qualification factors for any loan program has to be credit scores.  Your FICO credit score is also one qualification that most borrowers are familiar with prior to applying for a loan.  The one thing that may be a surprise to a borrower is the difference between what they think their FICO score is and what it actually is when being pulled by a credit reporting software.  When lenders pull your FICO score it is done with an algorithm that is created for mortgage borrowers which could vary significantly from what is seen online or what a car dealership will pull on you.  Given this, here are the credit scores needed for both sets of loan programs.
FHA Loans: When it comes to credit scores required for an FHA Loan there are 2 different sets of scores in place in order for you to get a loan.  First of all, if you have a 580+ FICO, you are able to obtain a mortgage with only a 3.5% down payment.  Now if you have a FICO score of 500-579 you can get an FHA Loan but you will be required to put 10% down plus compensating factors to strengthen your case.
Conventional Loans: The minimum credit score for a Conventional Loan per Fannie Mae and Freddie Mac is 620 FICO, however a lot of the times you are going to run into lenders who are going to require a 640+ FICO score.  If you run into this, this is called a Lender Overlay which in short is additional requirements you must adhere to in order to get a loan with that specific lender. You can rest easy knowing that when you come to Loan Consultants we will lend to the loan program’s minimum guidelines without any lender overlays in place.

FHA Versus Conventional Loans: Debt To Income Ratio

When it comes to Debt To Income Ratio or DTI Ratio for short, this is a vital guideline you need to know as it determines if you can financially support a mortgage with all your existing debt.  How your DTI Ratio is calculated is by taking all your monthly debt obligations which include credit card payments, student loans, and car loans, you add your proposed mortgage payment to this,  and then you divide it by your gross monthly income.  What this doesn’t take into account are your utilities and other payments that aren’t found on your credit report.
FHA Loans: These loans have 2 different DTI Ratios that are put into place and it all depends on the FICO score used to qualify for the loan.  If your FICO is 620+ you are able to have a 56.9% DTI Ratio but if your FICO is below 620 you will only be able to have a 43% DTI ratio.  As you can see, having a weaker credit score can cost you significant buying power when looking for a home.  This could mean the difference between a $200,000 home and a $250,000 home.
Conventional Loans: Depending on if you are going with a Fannie mae or Freddie Mac backed loan will determine the DTI ratio you are going to be able to have.  For Fannie Mae products you are only able to have a 45% DTI Ratio whereas with Freddie Mac products you are able to go as high as 50% DTI ratio.

FHA Versus Conventional Loans: Mortgage Insurance

You should know that if you are looking at mortgage insurance in the 2017 FHA Versus Conventional Loans discussion you will find that both loan programs have a mortgage insurance but there characteristics couldn’t be any different.
FHA Loans: First of all FHA Loans at closing have an Up-Front Mortgage Insurance Premium which is calculated as 1.75% of your loan amount and this is rolled into your loan amount and subsequent mortgage payment.  Also, there is a Mortgage Insurance Premium or MIP which is paid monthly and it equate to 0.85% of your loan amount divided by 12 months and this payment is rolled into your mortgage payment.  Now as long as you have the FHA Loan, you will be required to pay the monthly MIP.
Conventional Loans: Private Mortgage Insurance or PMI is what is included when you have a Conventional Loan.  Now this differs from FHA Loans in a few ways and the first way is it varies depending on the LTV of the loan.  For example, a loan with a 95% LTV will have a higher PMI than a loan with an 85% LTV.  Now the other difference is once LTV is under 80%, PMI is automatically cancelled since there is sufficient equity in the home.  There are also options at closing to avoid PMI by obtaining Lender Paid PMI.  This is where lender credits and borrowers funds can be used to prepay the PMI for the loan and you don’t have to worry about the PMI monthly payment.

FHA Versus Conventional Loans: Bankruptcy and Foreclosure

The FHA Versus Conventional Loans wouldn’t be complete if we didn’t look at the different ways that these programs treat derogatory items on your credit like bankruptcy, short sales, and foreclosures.  With each action there is a mandatory waiting period associated with it and the times vary greatly between both loan programs.
FHA Loans:

  • Chapter 7 Bankruptcy: 2 year waiting period after discharge date
  • Chapter 13 Bankruptcy: No waiting period required here as long as you have made at least 12 monthly repayments on time.  If you receive approve from your trustee you are also able to obtain an FHA Loan the day after your discharge date as well.  If you are going this route, a manual underwrite will be necessary in order to get your loan processed and to closing.
  • Short Sale: 3 year waiting period after recorded date or sheriff’s sale date
  • Deed-in-Lieu of Foreclosure: 3 year waiting period after recorded date or sheriff’s sale date
  • Foreclosure: 3 year waiting period after recorded date or sheriff’s sale date

Conventional Loans:

  • Chapter 7 Bankruptcy: 4 year waiting period from the discharge date
  • Chapter 13 Bankruptcy: 2 year waiting period from the discharge date or a 4 year waiting period from the dismissal date
  • Short Sale: 4 year waiting period from the recorded date
  • Deed-In-Lieu of Foreclosure: 4 year waiting period from the recorded date.
  • Foreclosure: 7 year waiting period from the recorded date

FHA Versus Conventional Loans: The Choice Is Yours

As you can see, there are many of differences between FHA Loans and Conventional and hopefully this 2017 FHA Versus Conventional Loans helped you in making the decision of which loan you are going to go with.  I guarantee that you won’t know everything there is to know about these loans, so that’s why I want to offer my service to you any day of the week at 888-900-1020 and I can work directly with you to ensure that you are taken care of and your loan questions are answered in full.  I always want my borrowers to be 100% confident with their decision and a lot of the times just reading an article isn’t enough.  You just need to remember that Loan Consultants does not have lender overlays and we will make loans to the minimum guidelines no questions asked.  What else we will do for you is close your loan in as little as 21 days and most loans are closed by 30 days.  We have streamlined operations here where the sooner we can get your loan closed the better unlike other lending institutions who may try to get you closed in 30 days and end up taking 45+ days.  Please reach out today and we can get started.

Working with us you will witness firsthand that we do not have lender overlays on Conventional Loans and we can get your loan processed to the minimum Conventional Loan Guidelines.  If you are currently working with a lender who you feel has overlays or cannot get your loan closed in 30 days or less, then you need to call us today at Loan Consultants at 844-275-2007. Text us for a faster response. The team at Loan Consultants is always here to help you. Our team at Loan Consultants is available 7 days a week, in the evenings, on weekends, and on holidays.

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