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Conventional 97 Mortgages Versus FHA Loans With 3.5% Down Payment

ByGustan Cho

This Article Is About Conventional 97 Mortgages Versus FHA Loans With 3.5% Down Payment
Do you believe that conventional 97 mortgages are being under-utilized in the marketplace? Fannie Mae and Freddie Mac relaunched the conventional 97 mortgages to compete with HUD’s 3.5% down payment home purchase FHA loans. Still to this day, many loan officers are not pushing and promoting the 3% down payment conventional loan program for first-time homebuyers. Most loan officers often offer the 5% down payment conventional loan program versus the 3% down payment first-time homebuyer conventional loan. If you have a borrower and a spouse co-borrower, only one of the borrowers need to be a first-time homebuyer.
There is no rule and/or law that states both borrowers need to be first-time homebuyers to qualify for a 3% down payment home purchase conventional loan. As long as one of the borrowers is a first-time homebuyer, they can qualify for a conventional 97 mortgage per Fannie Mae and Freddie Mac Agency Guidelines. There are many instances borrowers need to qualify for a conventional versus an FHA loan.

Conventional 97 Mortgages Becoming More Popular

There are many myths about qualifying for a conventional loan. You do not need a 20% down payment to qualify for a conventional loan. Down payment requirements are a 3% down payment for a first-time homebuyer and a 5% down payment for a seasoned home buyer on owner-occupant primary home conventional loans.

A first-time homebuyer is considered as a buyer who was not a homeowner in the past three years. Conventional loans allow for a second home and investment property financing. You do not have to pay outstanding collection accounts and/or charged-off accounts to qualify for an owner-occupant primary home conventional loan. Fannie Mae and Freddie Mac reintroduced conventional 97 mortgages to compete with HUD’s 3.5% down payment FHA loans. Fannie Mae and Freddie Mac have also lightened agency mortgage guidelines so more first-time homebuyers and borrowers with prior bad credit can qualify for conventional loans.

Conventional Versus Government Loans

There are three different government loan programs: FHA, VA, and USDA. Government loans are backed by either of the three government agencies. In the event, if a borrower defaulted and/or forecloses on a government loan, the federal agency will insure part or most of the loss sustained by the lender Conventional loans are not backed by any government agency. However, conventional loans need to comply and meet Fannie Mae and/or Freddie Mac Agency Mortgage Guidelines. Fannie Mae and Freddie Mac are the two mortgage giants in the United States that purchase mortgages. Mortgage Giants Fannie Mae and Freddie Mac are the two largest buyers of mortgages in the secondary mortgage market.

The Role Of Mortgage Giants Fannie Mae And Freddie Mac

The role of Fannie Mae and/or Freddie Mac is to provide liquidity in the mortgage markets:

  • It is because of Fannie and Freddie that mortgage companies can repeat the process of originating and funding mortgage loans at competitive mortgage rates in the United States
  • Mortgage bankers and correspondent lenders use their warehouse line of credit to fund mortgages to consumers
  • Once the lender funds the loan using their warehouse line of credit, they need to sell the loan to a larger mortgage banker to pay off their warehouse line
  • By selling the mortgages they fund to the larger mortgage banker, they now can relieve their warehouse line of credit and repeat the origination and funding more loans
  • Eventually, the larger mortgage banker will purchase more loans from smaller correspondent lenders and resell them in bulk to Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac will not purchase loans that do not conform to their lending guidelines. This is the exact reason why conventional loans are often referred to as conforming loans.

Comparison Of Conventional 97 Mortgages Versus FHA Loans

Even though both Fannie Mae and Freddie Mac have loosened their agency mortgage guidelines, conventional loans still have higher lending standards and guidelines than FHA loans. In this article, we will mainly cover conventional and FHA loans. We will not cover VA and USDA loans. Not everyone can qualify for a VA loan.

Only active and/or retired members of the United States Armed Services with a valid Certificate of Eligibility (COE) are eligible to qualify for a VA loan. USDA loans are only for certain parts of the United States that have been eligible for USDA financing by the U.S. Rural Development Department of Agriculture. Conventional loans account for close to fifty percent of all mortgages in the United States. Minimum credit score requirements on Conventional loans are 620 FICO. Debt to income ratio caps cannot exceed 50% DTI on conventional loans. Waiting period requirements after bankruptcy and a housing event are longer on conventional versus FHA loans. Mortgage payments on conventional loans are more credit-sensitive versus FHA loans due to not having backed by a government agency.

Benefits Of Conventional 97 Mortgages Versus FHA Loans

First-time homebuyers can qualify for Conventional 97 Mortgages with a 3% down payment which is lower than the 3.5% down payment required on FHA loans. The definition of a first-time homebuyer per Fannie and Freddie is a homebuyer who had no interest in homeownership in the past three years. The maximum loan limit on conforming loans for 2021 is $584,250 which is substantially higher than the 2021 HUD loan limit of $356,362 on FHA loans.

Conventional loans allow income-based repayment plans to be used for debt to income ratio calculations by mortgage underwriters on deferred student loans. HUD does not allow IBR payments on FHA loans. The waiting period after bankruptcy for borrowers who had a prior mortgage included in bankruptcy is four years from the bankruptcy discharged date. The date of the housing event does not matter. The borrower cannot have the mortgage reaffirmed. However, with FHA loans, the waiting period is three years from the date of the housing event. The bankruptcy discharged date does not matter on FHA loans. Freddie Mac’s HomeOne Conventional Mortgage Program is one of the most popular mortgage programs at Gustan Cho Associates. Over a third of our clients at Gustan Cho Associates choose Conventional 97 Mortgages as their home loan of choice.

Conventional 97 Mortgages Versus FHA Loans On Mortgage Insurance

HUD requires a one-time FHA mortgage insurance premium of 1.75% and an annual FHA MIP of 0.85% for the life of a 30-year fixed-rate FHA loan. All conventional loans with under a 20% equity position require private mortgage insurance. However, if the loan to value falls below an 80% LTV, private mortgage insurance can be canceled on conventional loans. Borrowers have an option to get a one-time upfront private mortgage insurance premium called Lender Paid Mortgage Insurance with no annual mortgage insurance premium called LPMI.

Similar to the FHA mortgage insurance premium, borrowers can purchase a one-time upfront private mortgage insurance and not worry about ever making a private mortgage insurance payment on conventional loans. Other options include the borrower-paid annual private mortgage insurance premium which can be dropped when the loan to value of the home falls below the 80% LTV threshold. There is no doubt more benefits on conventional versus FHA loans for borrowers.

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