FHA loan program

FHA vs Conventional Mortgages

posted in: Mortgages

Because there are many mortgage programs available for the average consumer, the choices can be confusing. The loan officer at 7th Level Mortgage will go over the different programs with you. The purpose of this blog is to provide you with a guide so when you talk to the loan officer you’ll have some of the information at your fingertips. Neither the FHA loan program nor the Conventional is better than the other. They serve different people with different financing needs.

  • Do you have to live in the house? With a Conventional loan, you do not need to live in the house. However, there is a caveat to this. Do NOT tell your loan officer that you are going to live in the house only to rent it out. That would be providing false information to the loan officer and would constitute fraud. With FHA loans, you MUST live in the house.
  • Can I refinance with either program? The answer is yes, but there are restrictions on loan to value and credit scores. The maximum loan to value on an FHA loan is 80% and you will incur MIP. With a conventional loan, the typical maximum loan to value is 80%, however, there are exceptions. If you are cashing out equity the maximum is 80%, but if you are simply refinancing and not receiving cash back, the maximum is 97%. Any loan to value over 80% will trigger the requirement that PMI is purchased.
  • Will I be eligible for a loan in a high-cost area? Because there are floor and ceiling limits, both FHA and Conventional loans are determined by a variety of factors. FHA loans are determined by the median home value in a county. The loan officer at 7th Level Mortgage has access to this list and will inform you of the values. Conventional loan limits are determined by county, state, and lender requirements, but will typically follow FNMA and FHLMC guidelines.
  • How high can my debt-to-income ratios be? With an FHA loan, you can have a ratio as high as 50%, but with a conventional loan, the lender does not typically exceed 43%.

Private mortgage insurance (PMI) can be eliminated once the LTV is 80% or lower. With an FHA loan, the only way to stop paying the Mortgage Insurance Premium (MIP) is to refinance into a conventional loan. The reason is that the FHA loan is guaranteed by the government, while conventional loans are not. The lender is assuming the risk of default. You will also note that the guidelines for a conventional loan are more stringent than with an FHA loan. Every borrower has their own unique set of issues which include credit scores, debt to income ratios, and loan to values.

Because the loan officers at 7th Level Mortgage have been trained and licensed by the National Mortgage Licensing System and have continuing education requirement guidelines, they will guide you through the process of qualifying, applying, and closing your loan quickly. If your credit score is 680 or higher, your loan to values does not exceed 80% and your debt to income ratios are 43% or lower, then a conventional loan would be the loan of choice for your needs. If you have issues with credit scores, higher loan to values, and higher debt to income ratios an FHA loan would be the choice for your needs.

One of the features that both FHA and VA loans offer is a streamlined refinance that conventional loans do not offer.

On January 23, 2022, FNMA announced a program called Home Ready. It allows the borrower to finance up to 97% of the home’s value and there is an article I wrote recently about the program. I urge you to read this article as well. The article will proved you with more information about the program, what the qualifying requirements are as well as what documentation you will need when you are applying.

Finally, there WILL be rate increases during the course of this year so I urge you to call the loan officer at 7th Level Mortgage today so you can start the process and avoid paying on a loan with a higher interest rate.