This guide covers conforming underwriting guidelines on conventional loans. Conventional Loans are called conforming loans because they need to conform to Fannie Mae and Freddie Mac Mortgage Guidelines. Conventional loans are not government-backed loans. No government entity insures and guarantees conforming loans. Dale Elenteny of Gustan Cho Associates explains why conventional loans are called conforming loans and what the role of Fannie Mae and Freddie Mac is on conventional loans as follows:
Many ask why conventional loans must conform to Fannie Mae and Freddie Mac Guidelines if conforming loans are not government-backed loans. Fannie Mae and Freddie Mac are the two mortgage giants in the United States that purchase mortgages in the secondary market. Fannie Mae and Freddie Mac are also Government Sponsored Enterprises (GSE).
For Fannie Mae or Freddie Mac to purchase mortgages from lenders on the secondary market, the mortgage must conform to Fannie Mae or Freddie Mac Mortgage Guidelines.. Fannie Mae and Freddie Mac will not purchase loans that do not meet Conforming Underwriting Guidelines. Lenders who are mortgage bankers have a warehouse line of credit. They use the warehouse line of credit to fund the loans they originate. However, all lenders do not want to tie up their lines of credit. Once they fund the mortgage, lenders sell the loans they fund on the secondary market to Fannie Mae or Freddie Mac. Once Fannie/Freddie purchases the loan from lenders, the lender will pay off their warehouse lines of credit so they can originate more loans. To purchase loans, lenders must follow and meet Conforming Underwriting Guidelines for Fannie or Freddie.
Cases Where Borrowers Need To Choose Conforming Versus FHA Loans
Conventional and FHA Loans are the top two most popular home loan programs in the United States. There are cases where borrowers need to go with conventional versus FHA loans. There are instances when borrowers need to go with Conforming Versus FHA loans. Borrowers with high student loan balances. Borrowers in community property state where a non-borrowing spouse has a lot of monthly debts. Borrowers with mortgages included in bankruptcy and the housing event were not recorded until recently. Borrowers who have non-occupant borrowers that are not related by blood, marriage, law
Conforming Underwriting Guidelines on Student Loan Balances
Conforming Underwriting Guidelines on student loans allows borrowers with Income-Based Repayments (IBR) that report on consumer credit reports to be used as a monthly student loan debt on conventional loans. It does not need to be fully amortized. As long as the student loan is on an IBR plan, conventional borrowers can use that payment as part of their monthly expenses when underwriters calculate their debt-to-income ratios. HUD, the parent of FHA, has recently updated HUD 4000.1 FHA Handbook guidelines on FHA loans, where FHA loans now accept income-based repayment on student loans.
Conforming Underwriting Guidelines In Community Property States
There are nine community property states in the United States. Per Conforming Underwriting Guidelines, non-borrowing spouses’ monthly debts in community property states do not have to be included when mortgage underwriters calculate borrowers’ debt-to-income ratios. This does not apply to FHA loans. Under HUD Guidelines, all monthly debt obligations on non-borrowing spouses will count on FHA loans.
Conforming Underwriting Guidelines on Mortgage Included In Bankruptcy
For borrowers with a prior mortgage included in a bankruptcy, there is a four-year waiting period after the discharge date of the bankruptcy to qualify for conventional loans. The final foreclosure date after the bankruptcy does not matter. As long as the housing event has been finalized through foreclosure, deed-in-lieu of foreclosure, or short sale, the waiting period is four years from the discharge date of the bankruptcy.
Non-Occupant Co-Borrower Conforming Underwriting Guidelines
Non-Occupant Co-Borrowers do not have to be related to the main borrower by law, marriage, or blood to qualify for conventional loans. Non-Occupant Co-Borrowers can be added to the main borrower on 3% to 5% down payment conventional loan programs. Borrowers with questions on this blog or any other mortgage topic, please get in touch with us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. The team at Gustan Cho Associates is available seven days a week, evenings, weekends, and holidays. We are mortgage lenders licensed in 48 states, including DC, Puerto Rico, and the United States Virgin Islands.
