Conventional Loan Requirements And Mortgage Guidelines

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Conventional Loan Requirements And Mortgage Guidelines

This BLOG On Conventional Loan Requirements And Mortgage Guidelines Was UPDATED On April 26th, 2019

What Are The Conventional Loan Requirements And Mortgage Guidelines:

There are new Conventional Loan Requirements that went into effect. Fannie Mae and Freddie Mac are the two mortgage giants in the United States that set up Conventional Loan Requirements. Conventional Loans are called Conforming Loans because they need to conform to Fannie Mae and/or Freddie Mac Mortgage Guidelines. The Federal Housing Finance Agency (FHFA) is the federal regulatory agency that regulates Fannie Mae and Freddie Mac.

  • Conventional Loans are not insured by any government entity
  • FHA Loans is insured by the United States Department of Housing and Urban Development or HUD
  • VA Loans are insured by the United States Department of Veteran Affairs or VA
  • USDA Loans are insured by the United States Department of Agriculture Rural Development
  • FHA Loans, VA Loans, and USDA Loans are called government loans because they are insured by the government in the event if the borrower defaults on their home loans
  • Government loans require little to no down payment and offer low mortgage rates
  • Lenders offer easy terms and rates on government loans because the risk is limited to the mortgage lender
  • FHA, VA, and USDA does not originate nor fund government loans
  • Private banks and mortgage companies originate and fund FHA Loans, VA Loans, USDA Loans
  • FHA, VA, USDA insures these loans to private banks and mortgage companies that follow their lending guidelines in the event if the borrower defaults on their mortgage loans and the file go into foreclosure
  • Upfront and annual mortgage insurance premiums are required on FHA Loans and USDA Loans
  • VA Loans require an upfront VA Funding Fee
  • However, there is no annual mortgage insurance premium with VA Loans

Conforming Versus Government Loans

Home Buyers cannot get second home financing or investment home financing with government loans:

  • Only owner occupant properties are allowed with FHA Loans, VA Loans, and USDA Loans
  • Fannie Mae and Freddie Mac does not insure mortgage loans
  • Fannie/Freddie purchases Conventional Loans originated and funded by Conventional mortgage lenders that meet Fannie Mae and Freddie Mac mortgage guidelines
  • Conventional Loans are called Conforming Loans
  • This is because they need to conform to Fannie Mae and/or Freddie Mac standards in order for Fannie Mae and/or Freddie Mac to be able to purchase them
  • There is no upfront mortgage insurance premium required on Conventional Loans
  • However, private mortgage insurance is required for all Conventional mortgage loans with greater than 80% loan to value 
  • But once borrowers get private mortgage insurance on a Conventional Loan, they are not committed to having private mortgage insurance for the life of the Conventional Loan
  • Private mortgage insurance on Conventional Loans can be canceled once homeowners have 20% or more home equity in a home
  • A home appraisal will be required to justify the value of the property in order to determine the loan to value
  • Conventional Loans are not guaranteed by the government against default by the mortgage borrower
  • Conventional mortgage rates depend on the following:
    • borrower’s credit scores
    • amount of down payment the home buyer puts down or loan to value
  • The higher the credit scores and the lower the loan to value, the better mortgage rates the Conventional mortgage borrowers will get

Conventional Loan Requirements On Credit Scores And Debt To Income Ratio Requirements

Minimum credit score requirements to qualify for a Conventional Loan, the mortgage borrower needs a 620 credit score.

  • FHA Loans require a minimum 580 credit score to qualify for a 3.5% down payment on a home purchase
  • Fannie Mac require a 5% down payment from a home buyer in order to qualify for a Conventional Loan
  • Fannie Mae will allow 3% down payment from home buyers for Conventional Loans
  • Freddie Mac will allow 3% down payment for home buyers who have had no ownership on a home loan for the past three years
  • Conventional Loans have a maximum debt to income ratio limit of 45% DTI
  • 50% debt to income ratio on conforming loans with 20% down payment or borrowers with 700 credit scores
  • FHA Loans limits the back end debt to income ratios to a maximum of 56.9% DTI as long as the FHA borrower has at least a 620 credit score
  • Any credit scores under 620 credit scores, the debt to income ratios gets reduced to 43% DTI

Conventional Loan Requirements On Second Home Financing And Investment Home Financing

Government Loans do not allow second home financing nor investment home financing.

  • FHA Loans, VA Loans, and USDA Loans are for owner occupant properties only
  • Home buyers looking for second home financing or investment home financing need to go with a Conventional Loan
  • 10% down payment is required for second home financing
  • With investment homes, it depends on the type of property the real estate investor is buying
    • Single-family homes that are investment homes require 15% down payment
    • 2 to 4 unit properties that are investment properties require more down payments as well as reserves.

Conventional Loan Requirements On Waiting Period After Bankruptcy And Foreclosure

Conventional mortgage loan borrowers can qualify for a Conventional Loan after a bankruptcy and foreclosure.

  • There is a four-year waiting period to qualify for a Conventional Loan after a Chapter 7 Bankruptcy discharged date
  • There is a two-year waiting period to qualify for a Conventional Loan after a Chapter 13 Bankruptcy discharged date
  • There is a four-year waiting period to qualify for a Conventional Loan after a deed in lieu of foreclosure and/or short sale
  • There is a seven-year waiting period to qualify for a Conventional Loan after a foreclosure

Home Borrowers with a mortgage part of bankruptcy , there is a four-year waiting period to qualify for a Conventional Loan from the discharged date of Chapter 7 Bankruptcy discharged date.

  • Foreclosure can be transferred out of name after the discharged date of Chapter 7 Bankruptcy discharged date
  • The recorded date of housing event transfer has nothing to do with the waiting period requirements on Conventional Loans
  • The 4 year waiting period clock starts from the discharged date of the Chapter 7 Bankruptcy

Cases Where Conventional Loans Are Beneficial Than FHA Loans

Borrowers with higher student loan balances may want to go Conventional Versus FHA Loan.

Here are the basis mortgage guidelines on student loans :

  • FHA no longer exempts deferred student loans in debt to income ratio calculations
  • HUD Guidelines On Deferred Student Loans state that 1.0% of the student balance be used as a hypothetical monthly debt
  • IBR no longer counts with FHA
  • Or borrowers can contact student loan provider and get fully amortized monthly payment overextended term (which is normally 25 years)
  • Fully amortized monthly payment turns out to be 0.50% of the outstanding student loan balance

VA Loans exempts deferred student loans on student loans that have been deferred for longer than 12 months:

  • If student loans are not deferred, VA requires 5% of the outstanding student loan balance to be taken into account and divided by 12 months
  • That figure will be the hypothetical student loan payment used in debt to income ratio calculations

Conventional Loan Requirements On Student Loans

Conventional Loan Borrowers can use Income Based Repayment (IBR) as their monthly student loan debt under the following conditions:

  • Need to be on an IBR payment
  • Need written statement of Income-Based Repayment from the student loan provider
  • IBR Payment needs to be reporting on credit reporting agencies
  • If IBR does not report, the lender needs to do a credit supplement

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