September 27th, 2016 3:59 AM by Jackie A. Graves, President
Housing Administration loans and conventional loans remain the most popular
financing types for today’s mortgage borrowers. But which program makes the
most financial sense for you? Here’s how to decide.
The Nuts & Bolts
of FHA Loans
loans are insured by the Federal Housing Administration. The program contains
two forms of mortgage insurance; an upfront mortgage insurance premium
calculated at 1.75% of the loan amount, and a monthly premium based on 0.8% of
the loan amount. These forms of mortgage insurance make the FHA loan pricey,
however the program is very flexible:
New mortgage post-short sale or foreclosure is a three-year wait
New mortgage post Chapter 7 bankruptcy is a three-year wait time
Payment-to-income ratios can be as high as 55%
Co-signers are permitted
Borrowers can finance up to 97% loan-to-value paying off a first
and a second loan under rate and term avoiding “cash out” (a lender term
that refers to the structure of a mortgage where you’re receiving funds to pay
off debt beyond what you owe. It is usually subject to more restrictive
guidelines, but that’s not the case with FHA loans.)
Very attractive interest rates as low as 3.25% on a 30-year
fixed rate mortgage
When FHA Makes Sense
The FHA program makes sense when you have
little equity to work with or a unique financial situation. You’ll need at
least a 3.5%
down payment to purchase a
home using an FHA Loan. The program will go as high as the maximum county loan
limit in the area in which you are looking. For example in Sonoma County,
California for a single-family home that means a loan size all the way to
$554,300. If your credit score is anything under 680, an FHA loan generally is
The Nuts & Bolts
of Conventional Loans
loans are loans bought and sold by Fannie Mae and Freddie Mac, and represent
the lion’s share of the mortgage market. These loans, while the most popular,
also contain tighter qualifying guidelines than FHA:
No mortgage insurance
with just 10% down
The wait for a new
mortgage post-foreclosure is seven years; there’s a four-year wait post
short-sale; and four-year wait post Chapter 7 bankruptcy
Offers the lowest
When a Conventional Loan Makes Sense
you have a credit score over 680 and a 5% down payment, you have the bare
minimum required to explore working with a conventional loan. Conventional
loans also are stricter on employment history, requiring two years in
the same field, as well as payment-to-income ratio, which is a max of 45%.
Which Loan Program Is
Most Suitable for Me?
Your credit score is 680 or higher
You have a big
If you have a big down payment and a so-so credit score under
680, then conventional could be a good vehicle, but your interest rate will be
higher due to credit score.
Your credit score is below
Divorced? Have a previous derogatory
credit event such
as a foreclosure? Then FHA would be the route to take.
Small down payment but great credit score? The FHA
primarily would be your vehicle, although a 5% conventional loan would be a
solid choice as well.
The key is to understand the characteristics of both
programs and how they relate to your financial picture. Right out of the gate
you might be a good candidate for either program. Selecting the right loan is a
function of choosing the one that is best in alignment with your payment and
cash flow expectations.
Remember, if you’re considering applying for a mortgage,
it helps to know not only how much house you can afford, but also where your
credit stands before you begin the process. That’s because your credit
scores help determine what types of rates and terms you may qualify for.
You can get two free credit scores,
updated every 14 days, on Credit.com.
By Scott Sheldon - To view the original
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