Conventional vs. FHA

[Anonymous]

We currently have a contract on a new construction home. When we first applied for the home, we tried with just my husband's credit as his is better than mine. At the time of application in February, his mortgage scores were 676/689/699. The lender said we were better doing FHA because of their leniency toward qualifying factors. Husband's app came back as a "refer" because his DTI with the mortgage payment was 55%, so I had to be added to the loan. Lender has an overlay on DTI and wants no more than 43%. Adding me on the loan with my income, our DTI becomes 35%. 

At the time of the loan app, my scores were well under the 580 requirement that the lender wanted FHA. I now have my mortgage scores up and they are 595/616/625.  

Construction has yet to start on the home(permits haven't been approved yet), and we were told from that the construction process from beginning to end is 120 days. 

Our lender also mentioned that when we first applied, their requirement for conventional was a 620 score. Our lender has stated the next hard pull of credit will come 30 days before closing. 

My question is, if I get my scores higher and can at least match my husband's score, is there a possibility of switching to conventional? I know conventional tends to be more conservative towards scores, but I'm wondering what that would mean for us. 

Are there credit requirements when going conventional in regards with collections and charge-off's being on credit? 

[StartingOver10]

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@Anonymous wrote:

We currently have a contract on a new construction home. When we first applied for the home, we tried with just my husband's credit as his is better than mine. At the time of application in February, his mortgage scores were 676/689/699. The lender said we were better doing FHA because of their leniency toward qualifying factors. Husband's app came back as a "refer" because his DTI with the mortgage payment was 55%, so I had to be added to the loan. Lender has an overlay on DTI and wants no more than 43%. Adding me on the loan with my income, our DTI becomes 35%. 

At the time of the loan app, my scores were well under the 580 requirement that the lender wanted FHA. I now have my mortgage scores up and they are 595/616/625.  

Construction has yet to start on the home(permits haven't been approved yet), and we were told from that the construction process from beginning to end is 120 days. 

Our lender also mentioned that when we first applied, their requirement for conventional was a 620 score. Our lender has stated the next hard pull of credit will come 30 days before closing. 

My question is, if I get my scores higher and can at least match my husband's score, is there a possibility of switching to conventional? I know conventional tends to be more conservative towards scores, but I'm wondering what that would mean for us. 

Are there credit requirements when going conventional in regards with collections and charge-off's being on credit? 

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^^^Wow, those lender overlays are very restrictive.  I have never seen a 43% back end ratio requirement for an FHA loan - conventional loan, yes, but not FHA. Are you sure they are running your app under FHA guidelines and not conventional guidelines?  Even the 55% is lower than many lenders will allow for FHA.  

You might want to consider other lenders too. If they are that restrictive on their FHA guidelines, no telling what other restrictions they have.

As to switching to conventional, if your credit score (lowest mid-mortgage score) gets to 680, it normally pays off in the long run for you to get a conventional loan. Where people run into an issue with the lower scores is the very high PMI cost.  Have the lender provide the matrix to you showing the relationship to LTV and credit score vs the cost of PMI.  

Here is an example with one of the PMI vendors:  

https://mortgageinsurance.genworth.com/RatesAndGuidelines/RateCards.aspx

if you click on the link you will see the cost of PMI based on score and LTV.  I don't know which PMI co your lender uses, I just picked one....

[Anonymous]

I thought the DTI requirement was restrictive as well on their end, especially when I've seen others on here go as high as 56%. However, after seeking advice from Shane, I was told that the DTI requirement was because with only my husband on the loan it was coming back as "refer/eligible" and manual underwriting for FHA is more strict than desktop approval. The lender's goal for us to get approve/eligible from the desktop underwriting. 

We really like this lender, and it also helps that this is the preferred lender with the builder, so going with them we get all of our closing costs, etc. paid. So all we need to come up with is the 3.5% down payment. Yes, I'm sure it was FHA that it was run through. Even the loan estimate we got with husband only has FHA Fixed 30yr on it. 

This lender has also been really good with telling us what we need to do to make sure we get approved through desktop underwriting, as we were told that's the goal for us. 

There's no other restrictions this lender has in place besides the DTI. 

[H-B]

If your credit score goes higher you can definitely ask for Conventional loan. FHA can go higher dti what you had on your initial  loan application. Your lender may have overlays.