Kentucky First Time Home buyers 2020
∘ What kind of credit score do I need to qualify for different first time home buyer loans in Kentucky?
Answer. Most lenders will wants a middle credit score of 620 for KY First Time Home Buyers looking to go no money down. The two most used no money down home loans in Kentucky being USDA Rural Housing and KHC with their down payment assistance will want a 620 middle score on their programs.
If you have access to 3.5% down payment, you can go FHA and secure a 30 year fixed rate mortgage with some lenders with a 580 credit score. Even though FHA on paper says they will go down to 500 credit score with at least 10% down payment, you will find it hard to get the loan approved because lenders will create overlays to protect their interest and maintain a good standing with FHA and HUD.
Another popular no money down loan is VA. Most VA lenders will want a 620 middle credit score but like FHA, VA on paper says they will go down to a 500 score, but good luck finding a lender for that scenario.
A lot of times if your scores are in the high 500’s or low 600’s range, we can do a rapid rescore and get your scores improved within 30 days.
∘ Does it costs anything to get pre-approved for a mortgage loan?
Answer: Typically if you have all your income and asset documents together and submit to the lender, they typically can get you a pre-approval through the Automated Underwriting Systems within 24 hours. They will review credit, income and assets and run it through the different AUS (Automated Underwriting Systems) for the template for your loan pre-approval. Fannie Mae uses DU, or Desktop Underwriting, FHA and VA also use DU, and USDA uses a automated system called GUS. GUS stands for the Guaranteed Underwriting System.
If you get an Automated Approval, loan officers will use this for your pre-approval. If you have a bad credit history, high debt to income ratios, or lack of down payment, the AUS will sometimes refer the loan to a manual underwrite, which could result in a longer turn time for your loan pre-approval answer
∘ Are there any special programs in Kentucky that help with down payment or no money down loans for KY First Time Home Buyers?
Answer: You typically can lock in your mortgage rate and protect it from going up once you have a home picked-out and under contract. You can usually lock in your mortgage rate for free for 90 days, and if you need more time, you can extend the lock in rate for a fee to the lender in case the home buying process is taking a longer time. The longer the term you lock the rate in the future, the higher the costs because the lender is taking a risk on rates in the future.
Answer: Depending on which loan program you choose, the outlay to close the loan can vary. Typically you will need to budget for the following to buy a home: Good faith deposit, usually less than $500 which holds the home for you while you close the loan. You get this back at closing; Appraisal fee is required to be paid to lender before closing. Typical costs run around $400-$450 for an appraisal fee; home inspection fees. Even though the lender’s programs don’t require a home inspection, a lot of buyers do get one done. The costs for a home inspection runs around $300-$400. Lastly, termite report. They are very cheap, usually $50 or less, and VA requires one on their loan programs. FHA, KHC, USDA, Fannie Mae does not require a termite report, but most borrowers get one done.
There are also lender costs for title insurance, title exam, closing fee, and underwriting fees that will be incurred at closing too. You can negotiated the seller to pay for these fees in the contract, or sometimes the lender can pay for this with a lender credit.
Answer: Most lenders will honor your loan pre-approval for 60 days. After that, they will have to re-run your credit report and ask for updated pay stubs, bank statements, to make sure your credit quality and income and assets has not changed from the initial loan pre-approval.
How much money do I have to make to qualify for a mortgage loan in Kentucky?
Answer: The general rule for most FHA, VA, KHC, USDA and Fannie Mae loans is that we run your loan application through the Automated Underwriting systems, and it will tell us your max loan qualifying ratios.
There are two ratios that matter when you qualify for a mortgage loan. The front-end ratio, is the new house payment divided by your gross monthly income. The back-end ratio, is the new house payment added to your current monthly bills on the credit report, to include child support obligations and 401k loans.
Car insurance, cell phone bills, utilities bills does not factor into your qualifying rations.
If the loan gets a refer on the initial desktop underwriting findings, then most programs will default to a front end ratio of 31% and a back-end ratio of 43% for most government agency loans that get a refer. You then take the lowest payment to qualify based on the front-end and back-end ratio.
So for example, let’s say you make $3000 a month and you have $400 in monthly bills you pay on the credit report. What would be your maximum qualifying house payment for a new loan?
Take the $3000 x .43%= $1290 maximum back-end ratio house payment. So take the $1290-$400= $890 max house payment you qualify for on the back-end ratio.
Then take the $3000 x .31%=$930 maximum qualifying house payment on front-end ratio.
So now your know! The max house payment you would qualify would be the $890, because it is the lowest payment of the two ratios.
- Minimum 620 Credit Score
- Max Purchase Price Limit of $314,827
- Max Household Income Limits of here in this link
- Max debt to income ratios of 40% and 50% respectively with Approved Eligible Findings Or Refer Eligible on FHA Loans
- No Bankruptcies last 2 years for FHA
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VA loans are for veterans and active duty military personnel. The loan requires no down payment and no monthly mi premiums, saving you on the monthly payment. It does have an funding fee like USDA, but it is higher starting at 2% for first time use, and 3% for second time use. The funding fee is financed into the loan, so it is not something you have to pay upfront out of pocket.
VA loans can be made anywhere, unlike the USDA restrictions, and there is no income household limit.
Most VA lenders I work with will want a 620 credit score though I am setup with lenders that will go down to a 560 credit score if I can get it approved.
VA requires 2 years removed from bankruptcy or foreclosure.
As announced previously by VA in Circular 26-19-30 (which provides interim guidance on implementing “The Blue Water Navy Vietnam Veterans Act of 2019”) the conforming loan limit cap on guarantees was removed for Veterans with full entitlement. For Veterans who have previously used entitlement and the entitlement has not been restored, the maximum amount of guaranty entitlement available to the Veteran (for a loan above $144,000) is 25 percent of the conforming loan limit reduced by the amount of entitlement previously used (not restored) by the Veteran. The new guaranty requirements apply for loans closed on or after January 1, 2020.
As a reminder, Veterans are able to use their VA Home Loan Guaranty benefit regardless of loan amount, but in order to purchase homes with loan amounts above the conforming loan limits, Veterans with partial entitlement may be required to make a down payment on amounts in excess of the conforming loan limit. Regardless of full or partial entitlement, the VA guaranty plus any required down payment must total 25% of the loan amount.
Kentucky Home Buyers
Regular DAP for Kentucky Home Buyers in 2020
- Purchase price up to $314,827 with Secondary Market.
- Assistance in the form of a loan up to $6,000 in $100 increments.
- Repayable over a ten-year term at 5.50 percent.
- Available to all KHC first-mortgage loan recipients.
- Secondary Market Income Limits here
Affordable DAP for Kentucky Home Buyers in 2020
- Purchase price up to $314,827 with Secondary Market.
- Assistance up to $6,000.
- Repayable over a ten-year term at 1.00 percent.
- Borrowers must meet Affordable DAP income limits.
More about down payment and closing costs
- No liquid asset review and no limit on borrower reserves.
- Specific credit underwriting standards may apply to down payment programs.
We just moved here the first of January in 2017 from Ohio to the Louisville, KY area and we found Joel’s website online. He was quick to respond to us and got back the same day on our loan approval. He was very knowledgeable about the local market and kept us up-to date throughout the loan process and was a pleasure to meet at closing. Would recommend his services.
“We were searching online for mortgage companies in Louisville, Ky locally to deal with and found Joel’s website, and it was a godsend. He was great to work with, and delivered on everything he said he would do. I ended up referring my co-worker at UPS, and she was very pleased with his service and rates too. Would definitely vouch for him.” September 2016
“We contacted Joel back in July 2011 to refinance our Mortgage and he was great to work with. We contacted several lenders locally and online, and most where taking almost 60 days to close a refinance, Joel got it done in 23 days start to finish,I would definitely recommend him. He got us 3.75% with just $900 in closing costs on our FHA Streamline loan.
“Joel is one of the best Mortgage Brokers I have ever worked with in my sixteen years in the real estate and mortgage business.” May 25, 2010
“Joel has always worked very hard to keep his word and to work out seasonable solutions to difficult problems. He is truly an expert in FHA and other type loans.” September 1, 2010
“I have worked with Joel since 1998. He is a great loan professional.” I refer most of my Louisville, Kentucky area home buyers to him and he always take special care of them. August 23, 2012
“Joel Lobb is a real professional in the lending industry, with many years of experience, he is the one to go to for any mortgage lending needs.” August 22, 2011
RICHARD VOLZ , Residential Sales , Remax Foursquare Realty
“When looking to purchase our new home in 2006, I had the pleasure of meeting Joel Lobb. Not only was he personable and easy to reach, he was extremely knowledgeable in his field and made sure to find us the best rate and a top notch mortgage company. We were able to complete the process in less than 3 weeks with his expertise. I find Joel to have the utmost high integrity and I recommend him to anyone who say’s they are need of mortgage assistance. He is also fantastic and keeping everyone up to date on the latest in the housing industry through his twitter posts. He provided great results for our family and we still communicate to this day!” August 21, 2010
“We first use Joel on our new home purchase in 2007 in St Matthews, Kentucky area and he was great to work with. We have since refinanced our home with him in 2010 when rates got really low and he has always delivered on what he says. I could not imagine using anyone else.”
Melody Glasscock March 2014
Contacted him about buying a home and he was great to work with. I was moving to Louisville Ky to take a new job and he walked me through the entire process. He explained to me all the different options for FHA, VA, USDA mortgage loans and credit score requirements versus Fannie Mae. Since I was a first time home buyer I needed alot of help and guidance. I would definitely recommend him. Fast to respond and available to answer questions that I or my realtor had after hours.
Anderson Johnson June 2018
We moved from Michigan to Northern Kentucky area and we were really impressed. We got a USDA loan no money down and closed in less than 3.5 weeks. We shopped around online with other lenders but Joel was always first to respond and his rates were just a little better than other lenders. He kept us informed through the process along with our realtor and there was absolutely no surprises like we heard from other co-workers and friends that they experienced in their loan process. We have already referred another co-worker to Joel . He’s AWESOME!
Disclaimer: No statement on this site is a commitment to make a loan. Loans are subject to borrower qualifications, including income, property evaluation, sufficient equity in the home to meet Loan-to-Value requirements, and final credit approval. Approvals are subject to underwriting guidelines, interest rates, and program guidelines and are subject to change without notice based on applicant’s eligibility and market conditions. Refinancing an existing loan may result in total finance charges being higher over the life of a loan. Reduction in payments may reflect a longer loan term. Terms of any loan may be subject to payment of points and fees by the applicant Equal Opportunity Lender. NMLS#57916http://www.nmlsconsumeraccess.org/
— Some products and services may not be available in all states. Credit and collateral are subject to approval. Terms and conditions apply. This is not a commitment to lend. Programs, rates, terms and conditions are subject to change without notice. The content in this marketing advertisement has not been approved, reviewed, sponsored or endorsed by any department or government agency. Rates are subject to change and are subject to borrower(s) qualification.
How do I qualify for an FHA loan in Kentucky?
Kentucky FHA loans allow buyers with down payments as little as 3.5% to buy a home, and with many state-sponsored down payment assistance programs like KHC or Kentucky Housing Agency down payment asssitance program of up to $6000 currently to use for your own down payment, Kentuck borrowers using FHA loans can can get the loan with zero money down.
They’re are other down payment assistance programs in KEntucky see below:
Kentucky FHA loans allow up to a higher debt to income ratio than conventional loans which are restricted to 45 to 50% debt to income ratio, which is much lower than most Kentucky FHA loans. That means more Kentucky FHa buyers can qualify for a home loan in case if your co-borrower cannot go on the loan due to credit issues.
Do I qualify for an FHA loan in Kentucky?
They’re are many FHA Kentucky loans requirements, which can be confusing. Some lenders are tougher and will not lend even though FHA will insure the loan. So check around on your FHA loan questions
- Buy a property you will use as your primary residence
- Your credit score must meet the minimum requirements of the FHA and the lender (FHA requires a minimum of 500 for 10% down and 580 for 3.5% down; however, lenders often require higher minimums)
- The property you want to buy has to meet the FHA criteria and get approved
- Must meet debt-to-income requirements
- Clear Cavirs number
- 3 years removed from foreclosure sale date
- 2 years removed from Chapter 7 Bankruptcy
- 1 year in Chapter 13 plan with good pay history and permission from trustee
The view and opinions stated on this website belong solely to the authors, and are intended for informational purposes only. The posted information does not guarantee approval, nor does it comprise full underwriting guidelines. This does not represent being part of a government agency. The views expressed on this post are mine and do not necessarily reflect the view of my employer. Not all products or services mentioned on this site may fit all people. NMLS ID# 57916, (www.nmlsconsumeraccess.org). USDA Mortgage loans only offered in Kentucky.
All loans and lines are subject to credit approval, verification, and collateral evaluation
Senior Loan Officer
American Financial Resources announced its new down payment assistance program that will provide grants for homebuyers, and caters especially to teachers, military members and first responders. The program will grant up to 2% of the purchase price and up to 6% of closing costs.
DPA Advantage Program Guidelines
Borrower Eligibility – Must meet one of the following three categories outlined below
- First-time Home Buyer
- Purchasing the subject property
- Will reside in the subject property as their principal residence
- Has no ownership interest in any residential property, for a period three years prior to the date of application.
- The exception will be for an individual who is a homemaker or single parent with no ownership interest in a principal residence, other than a jointly owned property with a former spouse, during the three-year period prior to the date of the application
- Borrower(s) Income
- The borrower, or borrowers if multiple applicants on the loan application, income must be equal or less than 140% of the state or county median income regardless of family size
- To determine the median income use the following web tool to determine median income https://homeready-eligibility.fanniemae.com/homeready/
- Borrower(s) income must be less than the median income * 1.4
- If overtime income is not used to qualify the borrower, then the overtime income doesn’t not count towards the 140%
- The income that the underwriter will use to qualify the borrower is what will be compared to the 140%
- The borrower, or borrowers if multiple applicants on the loan application, income must be equal or less than 140% of the state or county median income regardless of family size
- Current or Retired Employment or Volunteer/Non-Paid Member
- Any borrower on the loan application is a current, retired, or volunteer, which includes:
- First responder (includes police officer, firefighter, public safety officer, paramedic, EMT)
- Educator (includes Sunday school teacher, tutor, day care provider)
- Medical personnel (includes nurse, doctor, phlebotomists, health ambassador, Red Cross worker)
- Civil Servant in Federal, State, or Local Municipality
- Military Personnel
- Any borrower on the loan application is a current, retired, or volunteer, which includes:
- Borrower(s) must complete an 8 hour, first-time Homebuyer education course from a HUD approved Housing Counseling Agency. Click Here for a list of HUD approved counseling agencies
- Online counseling is acceptable. Click Here for an example of one national counseling agency
- Only one borrower must take the first-time Homebuyer education course
- If the borrower has already completed another approved course that will be acceptable provided the course expiration is after the closing on the loan
Down Payment Requirements from Homebuyer
- When factoring in the DPA Advantage grant the borrower is responsible for a down payment equal to 1.50% of the purchase price (FHA 3.50% down payment, minus DPA Advantage Programs 2.00 Grant)
- The borrowers 1.50% down payment responsibility can come from flexible sources such as a family member gift or a loan against a 401k retirement account
- Existing homes
- New Construction
- Includes: single-family one-unit residence, townhomes, detached, condominiums, and modular homes
- The interest rate on the DPA Advantage Program is significantly higher than a standard FHA Loan
- FHA 203 (b)
- FHA 203 (k) Standard
- FHA 203 (k) Limited
- FHA Repair Escrow
Maximum Purchase Price
- The maximum purchase price is the lower of FHA maximum County loan limit or the conforming loan limit, which is currently $484,350
- Click Here to determine the maximum base loan amount for a FHA Loan, based on the County in which the property is located
Maximum Debt-To-Income (DTI)
- Maximum DTI limit is 48.99
Minimum Credit Score
- FHA: 580
Multiple Property Ownership
- Not permitted
- Primary residence only
- Non-occupant co-signers allowed, so long as the primary borrower meets one of the three requirements for the DPA Advantage Program
Repayment Requirements and Affordability Period
- None. Completely forgivable grant
Here are action steps you can take right now to buy a home in Kentucky in 2020
1. Focus on your credit score
FICO credit scores are among the most frequently used credit scores, and range from 350-800 (the higher, the better). A consumer with a credit score of 750 or higher is considered to have excellent credit, while a consumer with a credit score below 620 is considered to have poor credit.
To qualify for a mortgage and get a low mortgage rate, your credit score matters.
Each credit bureau collects information on your credit history and develops a credit score that lenders use to assess your riskiness as a borrower. If you find an error, you should report it to the credit bureau immediately so that it can be corrected.
2. Manage your debt-to-income ratio
Many lenders evaluate your debt-to-income ratio when making credit decisions, which could impact the interest rate you receive.
A debt-to-income ratio is your monthly debt payments as a percentage of your monthly income. Lenders focus on this ratio to determine whether you have enough excess cash to cover your living expenses plus your debt obligations.
Since a debt-to-income ratio has two components (debt and income), the best way to lower your debt-to-income ratio is to:
First Ratio – The first ratio, top ratio or housing ratio. Basically that means out of all the gross monthly income you make, that no more that X percent of it can go to your housing payment. The housing payment consists of Principle, Interest, Taxes and Insurance. Whether you escrow or not every one of these items are factored into your ratio. There are a lot of exceptions to how high you can go, but let’s just say that if your ratio is 33% or less, generally, across the board, you’re safe.
Second Ratio- The second ratio, bottom ratio or debt ratio includes the housing payment, but also adds all of the monthly debts that the borrower has. So, it includes housing payment as well as every other debt that a borrower may have. This would include, Auto loans, credit cards, student loans, personal loans, child support, alimony….basically any consistent outgoing debt that you’re paying on. Again, if you’re paying less than 45% of your gross monthly income to all of the debts, plus your proposed housing payment, then……generally, you’re safe. You can go a lot higher in this area, but there are a lot of caveats when increasing your back ratio.
3. Keep credit utilization low on your credit cards
Lenders also evaluate your credit card utilization, or your monthly credit card spending as a percentage of your credit limit.
Ideally, your credit utilization should be less than 30%. If you can keep it less than 10%, even better.
For example, if you have a $10,000 credit limit on your credit card and spent $3,000 this month, your credit utilization is 30%.
Here are some ways to manage your credit card utilization:
- set up automatic balance alerts to monitor credit utilization
- ask your lender to raise your credit limit (this may involve a hard credit pull so check with your lender first)
- pay off your balance multiple times a month to reduce your credit utilization
4 . Look for down payment assistance in Kentucky
There are various types of down payment assistance, even if you have student loans.
Here are a few:
- FHA loans – federal loan through the Federal Housing Authority
- USDA loans– zero down mortgages for rural and suburban homeowners
- VA loans – if military service
- Kentucky Housing Down Payment Assistance Loan of $6000 available year around available up to 10 years at 1% or 5.5% depending on your income in the household and county you live in.
- $5,000 Welcome Grant available March 3rd 2020
There are federal, state and local assistance programs as well so be on the look out.
If you want a personalized answer for your unique situation call, text, or email me or visit my website below:
Mortgage Loan Officer
Individual NMLS ID #57916
American Mortgage Solutions, Inc.
10602 Timberwood Circle
Louisville, KY 40223
Company NMLS ID #1364
When it comes to financing a home a buyer is faced with the decision of what type of loan they want. The two most common choices are FHA or Conventional. Both have their advantages and disadvantages. Follow the chart below to see which one is a fit for you!
For more information on homes available for FHA or Conventional
Which Loan is better for you?
Kentucky FHA Loans are good for borrowers who have the following:
• Credit scores less than 680.
• Less than 5% down payment and no reserves to use.
• Borrowers with past foreclosures between 3 and 7 years old.
• Borrowers with past short sales between 2 and 4 years old.
• Borrowers who need a gift for the down payment and/or closing costs, prepaid taxes and
The FHA Mortgage Insurance premium is a premium that exists for the FHA Loan that is
paid up front and monthly by the homebuyer. This premium protects the lender should the
buyer default. They vary per state and per type of loan Kentucky home buyers qualify for. In Kentucky, upfront mortgage insurance premiums are 1.75%.
Below are the rates per type of loan:
• 15-Year Fixed with down payment more than 10%: .45%
• 15-Year Fixed with down payment less than 10%: .70%
• 30-Year Fixed with down payment more than 5%: .80%
• 30-Year Fixed with down payment less than 5%: .85%
Kentucky Conventional loans are usually reserved for the following:
• Credit scores greater than 680
• Greater than or equal to 5% down payment with reserves
• Borrowers with past foreclosures over 7 years old.
• Borrowers with past short sales between 5-7 years old.
• Borrowers who have a lot of money saved up and want to get rid of mortgage insurance within the first 5 years give or take. 20% equity position is needed for no mi
The biggest difference between conventional loans and FHA loans comes down to the mortgage insurance. Mortgage insurance is more expensive for FHA loans, but the trade off is a lower fixed rate than conventional loans.
On Conventional loans there is no upfront mortgage insurance like FHA, and if you have a high credit score you can possibly get a lower monthly mi premium as compared to FHA where everybody gets the same mortgage insurance premium not matter your credit score or down payment.
Lastly, FHA Mortgage insurance is for life of loan, whereas Conventional mortgage insurance or pmi it’s called, is discontinued once you reach the 80% threshold equity position of your home loan.
Again, I would not get too caught in FHA having mortgage insurance for life of loan, because most loans are only kept open a minimum of 5-7 years so a lot of times it may make sense to go with the lower rate and pay the mortgage insurance with FHA because most people don’t hold their mortgage for 30 years.
You can call or text me with your questions and we can compare the differences based on your credit score, down payment and income.
Equal Housing Lender. NMLS#:57916 http://www.nmlsconsumeraccess.org/Rates, terms, and program information are subject to change without notice. Subject to certain approvals, terms and conditions. This is not a commitment to lend.
Not part of any government lending agency and only lending in the State of Kentucky.
Looking at FHA loans vs Conventional loans can arm you with a lot of valuable information as these are the 2 most popular mortgage loan products today. Before getting to the content let’s look at some abbreviations that will need to be defined.
- PMI stands for Private Mortgage Insurance
- MIP stands for Mortgage Insurance Premium
- Credit Scores are a numerical measure of your credit worthiness, the maximum score is 850
- Debt-to-Income Ratio measures your monthly income versus your monthly obligations. A good rule of thumb is to try to be below 45%
FHA Loans vs Conventional Loans
Conventional Mortgage Benefits
- Minimum Down Payment is 5%
- Maximum loan amount is $424,100
- 20% down payment preferred to avoid PMI
- No upfront PMI
- 3% Down Payment Conventional Loan Option is available
- Mortgage Insurance is cheaper on a Conventional Loan at .51%
- PMI expires once principal balance is less than 78%
- Houses do not have to be owner-occupied (so they can be used at rentals)
- Can purchase any condominium and townhome (no FHA regulations)
Conventional Mortgage Disadvantages
- Significant upfront investment (20% down preferred)
- Credit score of 620 required
- No Down Payment Assistance
- Down Payment must be at least 5% unless you qualify for a 3% conventional mortgage
- Harder to Qualify for a Conventional Mortgage
- No government inspection so the home can be in any quality
- Only a portion of a down payment can be a gift
- Interest rates are higher than FHA loans
Most of the disadvantages of conventional mortgages stem around qualifications and resources needed upfront. If a borrower has significant resources most of these disadvantages are of little consequence.
FHA Loan Advantages
The major advantage to going with an FHA loan is that there are much more lax credit standards you have to meet to obtain financing. Usually, FHA mortgages require a lower down payment, can work with lower credit scores, less elapsed time is needed if you have some credit problems (charge-offs, foreclosures) and you can use a non-occupant co-borrower or co-signer (who is a relative) to help you qualify for the loan. That way you can use blended ratios. Blended ratios are debt-to-income ratios that equally blend or combine the primary borrower’s income and the non-occupant co-borrower’s income and monthly payments to help get approval for the loan. Except for HomeReady (formerly Fannie Mae HomePath) mortgages, conventional loans do not allow you to use a non-occupant co-borrower.
- Government-backed program. Ideal for first-time home buyers
- Easier to obtain, lower credit scores needed and lower minimum down payment
- Down Payment minimum is 3.5%
- All of down payment can be a gift
- Down Payment Assistance Available (in some circumstances)
- No reserves required
- Minimum credit score is 580 (for 3.5% down payment)
- Home has to meet a minimum condition to be approved for FHA so there are less potential upfront repairs needed
- Lower interest rates than conventional mortgages
FHA Loan Disadvantages
- FHA loans require the owners to live in the home
- Mortgage Insurance Premium required if borrowers put down less than 10%
- Private Mortgage Insurance monthly cost is higher for FHA loans
- Government Licensed Inspector required to inspect home before sale can be approved
- FHA maximum loan limit is $271,050
- Condominiums require FHA approval
- FHA Loans take longer to process because of government requirements and all mandated repairs have to be completed before sales can be finalized
Most of these disadvantages involve extra requirements or limits added to the process of the house (see Pros and Cons of FHA Loans). Some of these might not be disadvantages depending on one’s personal situation, but they are extra steps to note. Since FHA mortgages are a government program, more care and consideration goes into the process, which may be better in some situations.
Compare and Contrast FHA loans vs Conventional loans
There are four important numbers in deciding which loan you will go with: credit scores, down payment amount, debt-to-income, and mortgage insurance percentage rate. Conventional mortgages and FHA home loans have different limits and rates which are important to examine. They also have important differences which affect the availability of properties, the condition of the properties one wishes to buy and how your down payment can be paid. So comparing FHA loans vs Conventional loans can sometimes be a tricky endeavor.
Down Payment Requirements
- Conventional Mortgages require between 5 and 20% upfront
- In certain circumstances, down payments can be as low as 3% (Conventional 97 loan program)
- FHA Mortgages have 2 possibilities
- If Credit Score is 500-579 then 10% down payment is required (not all lenders will even go down this low)
- If Credit Score is 580+ then 3.5% down payment is required
- Conventional Mortgages’ maximum debt-to-income ratio is 43% (hard cap)
- FHA Mortgages’ maximum debt-to-income ratio is 45%
- Soft cap as in certain circumstances this can be adjusted up to 50%
Mortgage Insurance Premium Rates
- Conventional Mortgages PMI rate is .51% PMI
- FHA Mortgages
- If Down Payment is 10% or more the percentage is .80% MIP
- If Down Payment is less than 10% the rate is .85% MIP.
Credit Score Minimum Requirement
- Conventional Mortgage minimum credit score
- Most lenders will require between 620 and 640
- Some lenders it will be as high as 700
- FHA Mortgage minimum credit score
- Credit Score is a minimum of 500 if putting 10% down
- Credit Score is a minimum of 580 if not
These four numbers are important to know and will affect one’s decision to pursue a particular type of home loan. Knowing your combination of numbers as you are looking to buy a house will help buyers find the best loans for their particular situation.
- All sellers will take conventional mortgages and some sellers will not take FHA Loans
- People looking for short-sells won’t take FHA because FHA has a longer closing process.
- If sellers know there are FHA repairs that are needed in order to sell their house, they will not always accept FHA financing.
Thus, if one is wanting a low-risk transaction then the FHA home loan route is a better option to pursue, even though it limits your options for homes that you might wish to buy. If one is looking to fix-up a house and raise its equity quickly then a conventional loan is going to be more beneficial because there are no requirements as to the condition of the house and it’s occupied status.
Down Payment Gifting
- Making the Down Payments (Assistance and Gifts)
- Conventional mortgages have no assistance but can be partially fulfilled with a gift
- FHA Mortgages have loans and assistance programs available and the whole down payment can be fulfilled with a gift
In this article, we have given you the basic parameters of FHA loans vs Conventional loans. The conventional loans are for people who have a better financial track record and can handle a larger upfront cost. Because of PMI, conventional loans are cheaper in the long run if you can put enough of a down payment to get rid of PMI. However, there are no down payment assistance programs to help you reach that goal. FHA loans are for people who are looking to build their investment and in some cases may not have a great financial track record. FHA loans have lower down payment requirements and many grants/forgivable loans to help people wanting to buy a first house in which to live for at least a few years. It is important to assess your situation and decide which mortgage is going to work better for your circumstances.
Both mortgages have a lot of benefits and drawbacks because they are designed for people with different needs. This article has hopefully helped you to get a basic understanding of the different terms and conditions of different mortgage packages when looking at FHA loans vs Conventional loans. Home buying can be an emotional roller coaster and the knowledge in this article will help you navigate the various emotional struggles of home buying.