June 2nd, 2017 7:10 AM by Jackie A. Graves, President
When exploring mortgage options, it’s likely you’ll hear about
Federal Housing Administration and conventional loans. Let’s see, FHA loans are
for first-time home buyers and conventional mortgages are for more established
buyers — is that it?
the differences between FHA loans and
conventional mortgages have narrowed in the past few years. Since 1934,
loans guaranteed by the FHA have been a go-to option for first-time home buyers
because they feature low down payments and relaxed credit requirements.
conventional loans — which are not insured by a government agency like the FHA,
the Department of Veterans Affairs or the U.S. Department of Agriculture — have
gotten more competitive lately.
types of loans have their advantages. Here are the factors to consider when
deciding between an FHA and a conventional mortgage.
kind of property are you buying? You can use a conventional loan to buy a
vacation home or an investment property, as well as a primary residence.
same can’t be said about FHA loans.
FHA loan must be for a property that is occupied by at least one owner, as a
primary residence, within 60 days of closing. Investment properties and homes
that are being flipped (sold within 90 days of a prior sale) aren’t eligible
for FHA loans.
appraisals are more stringent, as well. Not only is the property assessed for
value, it is thoroughly vetted for safety, soundness of construction and
adherence to local code restrictions.
you’re planning to buy your home can play a role in what kind of loan is best
for you. FHA and conventional loan guidelines allow wide latitude for borrowers
in expensive areas, but in some cases you may end up needing a jumbo loan, which
is bigger than FHA or conventional limits.
loans are subject to county-level limits based on a percentage of a county’s
median home price. In certain high-cost areas, the limit in 2017 can be as high
as $636,150 — and in Alaska, Guam, Hawaii and the Virgin Islands, limits
can be much higher than that.
loans guaranteed by Fannie Mae and Freddie Mac, the government-sponsored
companies that help fund the conventional mortgage industry, single-family home
loan limits are $424,100 in most of the country. Again, higher loan ceilings
are available in pricier counties.
can find your county’s loan limits for FHA (shown at the link as “FHA forward”)
and conventional mortgages (“Fannie/Freddie”) on the Department of
Housing and Urban Development website.
is where conventional loans have really improved. FHA loans used to be the
low-down-payment leader, requiring just 3.5% down. But now, Fannie Mae and
Freddie Mac both offer 97% loan-to-value products; that means a 3% down payment
option — even lower than FHA — for qualified buyers.
time to time, you can find lenders offering
down payment options that
are even lower on conventional loans. Quicken Loans, for instance, has offered a 1%
instance where FHA and conventional standards have converged: how bad credit is
accounted for. Over the past few years there have been numerous changes to the
policies regarding bad-credit issues and how they are treated for FHA and
conventional loans, with new standards implemented — and then expiring.
as it stands now, for a buyer to qualify for either an FHA
or conventional loan, it typically must be two years since a bankruptcy
was discharged and three years since a foreclosure or short sale.
will definitely be hurdles to clear to prove to a lender that you have
re-established your creditworthiness:
a down payment of less than 20%, both FHA and conventional loans require
borrowers to pay mortgage insurance premiums. This insurance helps defray the
lender’s costs if a loan defaults.
are some differences between the two insurance programs.
an FHA loan, if you put less than 10% down, you’ll pay 1.75% of the loan amount
upfront and make monthly mortgage insurance payments for the life of the loan.
With a down payment of 10% or more (that is, a loan-to-value of 90% or
better), the premiums will end after 11 years.
loans with less than 20% down charge private mortgage insurance. It can be
charged as an upfront expense payable at closing, or built into your monthly
payment — or both. It all depends on the insurer the lender uses.
rates for PMI vary according to two factors: credit score and loan-to-value
ratio,” Joe Parsons, a senior loan officer with PFS Funding in Dublin,
California, says. He provides the following examples:
generally can be canceled once your loan is paid down (and/or your property’s
value appreciates) to 78% of your home’s value.
Upfront premium cost
Depending on the insurer, there may or may
not be an upfront premium. You can also opt to make a single-premium payment
instead of monthly payments.
Monthly premium cost
Cost varies. Based on loan term, amount and
down payment. For purchase loans, the premium ranges from 0.45% to 1.05%,
according to the FHA.
Cost varies. Based on credit score and
loan-to-value. For purchase loans, fees can range from 0.55% to 2.25%, according
to Genworth and the Urban Institute.
With down payments less than 10%, you’ll
pay mortgage insurance for the life of the loan. With a loan-to-value equal
to or greater than 90%, you’ll pay the premiums for 11 years.
Usually can be canceled once your loan
balance reaches 78% of your home’s value.
is the primary distinction between the two types of loans: FHA loans are easier
to qualify for. As far as a credit score, FHA sets a low bar: a FICO of 500 or
above. Lenders can set “overlays” on top of that credit score requirement,
hiking the minimum much higher.
to qualify for the lowest FHA down payment of 3.5%, you’ll need a credit score
of 580 or more, says Brian Sullivan, HUD public affairs specialist. With a
credit score between 500 and 579, you’ll need to put down 10% on an FHA
loan, he adds.
average FICO score for FHA purchase loans closed in 2016 was 686, according to
mortgage industry software provider Ellie Mae.
loans typically require a FICO credit score of 620 or better, Parsons says.
borrower with that score who can document income and assets will, in all
likelihood, receive a loan approval,” he says. “They will pay a higher price
for that loan because of ‘risk-based pricing’ from Fannie Mae and Freddie Mac,
but it is unlikely that they will be declined because of their credit score.”
pricing means compensating the lender for taking the additional risk on a
borrower with a lower credit score (the average FICO score for a conventional
loan was 753 in 2016, according to Ellie Mae). In other words, the lower your
credit score, the higher your mortgage interest rate.
Sullivan says your debt-to-income ratio — including the new mortgage, credit
cards, student loans or any other monthly obligations — must be 50% or less for
an FHA loan. Ellie Mae reports the average debt ratio for borrowers closing FHA
purchase loans in 2016 was 42%.
loans usually require a debt-to-income ratio no higher than 45%, Parsons says. In
2016, borrowers with conventional purchase loans averaged a 34% debt ratio,
according to Ellie Mae.
distinction for FHA loans: generally lower mortgage interest
rates. However, the difference between the two was incremental last
year. The 30-year fixed rate for FHA purchase loans closed in 2016 averaged
3.95%, compared with a conventional mortgage rate on the same term of
4.06%, according to Ellie Mae.
far as mortgage refinancing goes, the edge goes to FHA “streamline”
refinancing. With no credit check, no income verification and likely no home
appraisal, it’s about as easy a refi as you can get. But there are five
requirements for an FHA streamline
decision may initially be based on your credit score. If it’s well below 620,
an FHA loan may be your only choice. Above 620 and you’ll want to run the
numbers on both to see what works best for you.
if you are serving in the military or are a veteran, a loan backed by the
VA may be the way to go. VA loans usually
require no down payment. And if you live in a suburban or rural area, a USDA loan could
be a smart option, too.
Financing for a primary residence only
Financing for a primary residence, second
home or investment property
Down payments as low as 3.5%
Some programs offer down payments as low as
3% or even lower
Mortgage insurance premiums required: 1.75%
upfront and monthly premiums that vary with your loan term, loan amount and
down payment, from 0.45% to 1.05%
With a down payment lower than 20%, private
mortgage insurance is usually required. Monthly fees vary according to credit
score, loan-to-value and insurer, and range from 0.55% to 2.25%.
Credit score of 500 or better is usually
required, though this depends on the lender. Average FICO score in 2016: 686.
Credit score of 620 or higher is usually
required, though this depends on the lender. Average FICO score in 2016: 753,
according to Ellie Mae.
Average 2016 debt ratio: 42%
Average 2016 debt ratio: 34%
Interest rates for FHA loans tend to be
slightly lower than for conventional loans
Interest rates for conventional loans tend
to be slightly higher than for FHA loans
Hal Bundrick - To view the original article click here