| When you are looking at the different loans available | | | | the non-recurring costs. They are not allowed to pay |
| to purchase or refinance, it can be confusing. Over the | | | | the recurring costs such as taxes, insurance or |
| past year there have been many changes in the | | | | pre-paid interest. On an FHA loan, they can pay both |
| underwriting guidelines for all mortgages. FHA has | | | | recurring and non-recurring costs. |
| become a very popular choice for many home buyers. | | | | One of the other benefits of an FHA loan is that they |
| Let's take a look at the basic differences between an | | | | will allow a non-occupant co-borrower to co-sign on |
| FHA loan and a conventional loan. | | | | the loan. The income of both the borrower and |
| FHA stands for Federal Housing Administration. FHA | | | | co-borrower will be combined and used for qualifying. |
| insures loans that are made by approved FHA lenders, | | | | On a conventional loan, the owner occupant must |
| they do not lend directly to borrowers. FHA provides | | | | qualify at 35%/43% ratios unless higher ratios are |
| lenders with insurance in case a borrower defaults on | | | | approved by the Automated Underwriting System. |
| their loan. | | | | Another difference between conventional and FHA |
| Fannie Mae and Freddie Mac are government | | | | loans is regarding private mortgage insurance. FHA |
| sponsored enterprises (GSE). Their mission is to | | | | mortgage insurance is required on all 30 year FHA |
| provide stability and liquidity to the U.S housing and | | | | home loans regardless of the loan to value. FHA has a |
| mortgage markets. These GSE's also do not lend | | | | monthly mortgage insurance premium and an upfront |
| directly to borrowers, but they help to ensure that the | | | | mortgage insurance premium. Even though it is called |
| banks and mortgage companies have funds to lend at | | | | an upfront mortgage insurance premium, it is usually |
| affordable rates. These types of loans are typically | | | | financed into the new loan. On average, the upfront |
| conventional loans. | | | | premium is 1.75% of the loan amount. Once you have |
| The FHA underwriting guidelines are generally more | | | | paid on the monthly mortgage insurance premium for a |
| liberal than on a conventional loan. The minimum down | | | | minimum of 5 years and the loan to value is 78% or |
| payment required by FHA is 3.5%. All of the down | | | | below, you can get rid of the monthly mortgage |
| payment can be a gift from a family member. The | | | | insurance. Speak to your current lender for |
| seller is allowed to pay up to 6% of the purchase price | | | | requirements to remove the PMI. |
| towards the buyers closing costs. To be eligible for the | | | | Conventional home loans also require private |
| 6% from the seller, it must be negotiated in the | | | | mortgage insurance; however, they only have a |
| purchase contract. The minimum credit score that | | | | monthly mortgage insurance premium. They do not |
| most lenders will allow on an FHA loan is 580. | | | | require the upfront MIP. Also, conventional loans usually |
| At this time, the minimum down payment on a | | | | only require mortgage insurance on loan to values that |
| conventional loan is 5% - 10%. Due to the lack of | | | | are over 80%. You can have the mortgage insurance |
| private mortgage insurance available, most lenders are | | | | removed from your conventional loan once you have |
| requiring that the borrower have a minimum credit | | | | paid for 5 years and the loan to value is 80% or |
| score of 720 for a loan to value of 90% - 95%. The | | | | below. Check with your current lender for specific |
| seller can pay up to 3% of the purchase price toward | | | | documentation needed to have your PMI insurance |
| the buyers closing costs. However, they can only pay | | | | removed. |