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FHA vs. Conventional Loans
 

FHA - Rates are lower than Conventional

 

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FHA vs. Conventional Financing


FHA - Rates are lower than Conventional
The main advantage to FHA home loans is that the credit qualifying criteria for a borrower are not as strict as conventional financing.
FHA will allow the borrower who has had a few "credit problems" or those without a credit history to buy a home. 

FHA was created by the federal government to provide affordable housing financing for qualified borrowers. FHA provides 100% of the loan, the lender eliminating risk. The borrower pays an initial insurance premium, which is approximately 1.5% of the loan amount. This amount can be absorbed directly into the loan amount. The borrower also pays a monthly premium of .5% of the loan amount divided by 12 months. FHA requires deposit of 3%. This money can be a gift. No reservations are necessary. Closing costs can be funded in the amount of the loan.


Borrowers must provide proof of income sufficient to demonstrate the ability to pay the mortgage. FHA guidelines are more relaxed, for example, a bankruptcy, which was unloaded at least 2 years, the use of other forms of credit (utilities, cable TV, auto or medical insurance premiums, caring for children, school fees, furniture or appliance store accounts) Place of traditional credit, and higher ratios of debt to income. FHA interest rates are extremely competitive with conventional rates.


Fannie Mae conventional loans are loans made at the risk of the borrower, without the benefit of any warranty insurance or government. A conventional mortgage with a LTV (loan to value ratio) of more than 80% requires primary mortgage insurance, which can be paid monthly. The borrower must have 5% of its own funds for the payment and 2 months reserves of the deposit. Closing costs should be paid by the borrower.
requirements for a conventional loan include an excellent candidate to credit, job stability with sufficient income, a significant down payment, and a low debt to income. Borrowers who meet Fannie Mae guidelines are rewarded with an interest rate slightly lower than an interest rate FHA.

Example
 FHA Conventional
Maximum Loan Limits per CountyYes No
Mortgage insurance included in loanYes Not always
*Maximum purchase loan97% 107%
Rate depends on Credit ScoreNo Yes
Seasoning requirement for bankruptcy2+ yrNone with some programs
Seasoning requirement foreclosure2+ yr Varies on program
Open CollectionsNone Varies on program
Drop mortgage insurance with equityNo Yes
Non-verified (stated) income programsNo Yes
Streamline refinanceYes No
Non-occupant cosignerYes No
    
* There is a 102% FHA program- 97% first mortgage and a 5% second mortgage.  Qualification for the 5% second mortgage though is based on low income limits set per county.

 

 
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