This a great question from one of my Future Home Owners:
“What are the advantages to qualifying for a Conventional Mortgage over an FHA mortgage?
Both FHA and Conventional loan products are great for new and repeat home buyers. With each loan type there are aspects that are helpful to home buyers depending upon their circumstances.
Conventional loans tend to be the most desirable loan type - not including USDA or VA which allow for 100% financing. So, the question is, why? If both FHA and Conventional loans are good how could one be more advantageous and fiscally beneficial?
Let’s look at some of the benefits:
1. Various Down Payment Options -
The common misconception is that users of this loan type need to put down large amounts to qualify. Not so. There are down payment options that are as low as those allowed for FHA loans.
2. MI Advantages - Mortgage
Insurance or MI is charged to a borrower whenever a downpayment of less than 20% is applied to the financing. It is essentially insurance the lender takes out to cover some of their in case a borrower defaults. The premium payment is passed on to the borrower. It can vary in amounts based on credit, location and type of property and down payment. The amount will range from loan to loan.
MI on a Conventional loan can be cancelled or automatically removed at a certain point with a Conventional mortgage. With an FHA mortgage unless a down payment is made of 10% or more, mortgage insurance must be paid for the life of the loan. Since this payment is an extra, but required charge to the borrower it becomes advantageous to have the MI reduced or removed as soon as possible so that these funds can be put to other uses like savings, investment or debt/ mortgage principle pay down.
3. Qualification Advantages -
Unlike the guidelines for FHA loans Conventional guidelines allow for 2106 expenses, tax return write offs for Unreimbursed Job Expenses, to be excluded and not deducted from monthly salary as is required for FHA qualifications.
Additionally, when I work with families on Conventional qualifications I am able to use the Student Loan payments as stated on the credit report where FHA loans require me to ensure those payments listed on the report are fully amortized or 1% of the total student loan amount.
Borrowers can request to have MI removed once they have a loan to value ratio of 80% or once they have 20% equity in the property. The lender will review the loan for on-time payment etc. to see if the borrower qualifies.
Additionally, and this is very important, once the loan to value ratio is 78% with the Borrower having 22% equity the MI must be removed by the lender. This is one to keep an eyeon in the event that the lender misses this landmark.