A couple years ago, FHA had 2% of the market as far as mortgage products originated. Today, FHA loans account for 40%, that number is still growing, and there is a reason for it (see comparisons below, as FHA allows more people to qualify). Unless a seller wants to lose 40% of its prospective buyers, they really want to consult with their legal council about getting their condo project FHA approved. The bank I work for is delegated from HUD to assist with this process.
Here is a quick overview of the major differences between Conventional and FHA loans
| Conventional Loans |
FHA Loans |
| 5% Minimum Down Payment | 3.5% Minimum Down Payment |
| If less than 20% down, then 5% down must be from primary borrowers own funds |
No minimum down payment from primary borrowers own funds. All down payment funds can come from gift from family or from Down Payment Assistance Programs (Yes, Down Payment Assistance Programs are available, but they work with FHA loans only) |
Borrower may incurs one time fee at closing when credit scores go below 740, and the fee ranges from 0.25% to 3.0% of the loan amount) |
Borrower incurs one time fee when credit score goes below 660, and the fees are nominal (0.25% of loan amount) |
Borrower incurs one time 0.75% fee at closing if borrowing more than 75% of properties value on condo purchase |
No additional fees for condo purchase |
Private Mortgage Insurance (PMI) required if less than 20% down |
FHA Mortgage Insurance always required on 30 year amortizations |
| PMI companies now have their own guidelines |
FHA Mortgage Insurance follows Automated Underwriting Approval – no additionalhurdles to jump through to get FHA Mortgage Insurance |
| 680 middle credit score (some lenders have “overlays” and require 720 middle credit score) |
620 middle credit score needed |
| 41% max monthly Debt To Income (DTI) Ratios |
Max monthly debt to income ratio (DTI) is determined by automated underwriting system, and is very likely to go much higher than 41% |
| Non-Occupying co-borrowers income will not be counted towards DTI Ratios – Parent co-signing does not help with DTI qualifying |
Non-occupying co-borrowers income will be blended with primary borrowers income and counted towards DTI ratios, which will help more borrowers qualify |
| Monthly PMI is pretty expensive when putting down less than 10% |
If putting down less than 10%, FHA’s monthly mortgage insurance costs are significantly cheaper than Conventional loan’s monthly PMI, resulting in a lower total monthly housing payment for borrowers, meaning they can afford higher purchase prices and sellers can sell higher. |
Bryan Kelly, Sr. Mortgage Consultant at Wintrust Mortgage
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