This Article Is About Conforming Down Payment Guidelines For Home Buyers
Conventional Loans are called conforming loans because they need to conform to Fannie Mae and/or Freddie Mac Guidelines. Conforming Loans are not government loans. The Federal Housing Finance Agency (FHFA) regulates Fannie Mae and Freddie Mac. Why do conforming loans need to conform to Fannie Mae and Freddie Mac Guidelines? The role of Fannie and/or Freddie is to purchase conventional loans originated and funded by private lenders. Once lenders resell the loans they funded, it relieves them of their warehouse line of credit and they get to originate more loans.
There is no government guarantee on conventional loans. To keep up with the competition of FHA, Conforming Down Payment Guidelines was lowered to a 3% down payment for homebuyers who did not have any ownership of a home in the past 36 months. This is lower than FHA’s 3.5% down payment requirements.
How To Qualify For 3% Down Payment On Home Purchase
Conforming Down Payment Guidelines are 3% for first-time home buyers and 5% for seasoned home buyers. First time home buyers are defined as a buyer who had no interest in ownership of a home in the past 3 years. Not all lenders offer the 3% down payment conforming loan program. To compete with HUD, both Fannie Mae and Freddie Mac implemented Conforming Down Payment Guidelines with lower down payment requirements for first-time homebuyers.
Fannie Mae and Freddie Mac are the two mortgage giants in the United States and are called Government Sponsored Enterprises (GSE). The role is to purchase mortgages from lenders.’ Both Fannie and Freddie realize that many people are able to afford housing payments. Saving for a down payment is a major issue for most Americans. Home Buyers with good credit and income can now opt to qualify with the 3% down payment conventional loan program instead of compromising with the 3.5% FHA Loan.
Conforming Down Payment Guidelines On 3% Versus 5%
Per Conforming Down Payment Guidelines, the 3% down payment conventional loan program is similar to the 5% down payment program. Home Buyers need to meet all conforming mortgage guidelines. Since conforming loans are not insured and guaranteed by the government, the less down payment homebuyers put down, the more risk lenders have.
To get an approved/eligible per Automated Underwriting System may require higher credit scores and lower debt to income ratios on the 3% down payment conventional loan program versus the 5%. Private Mortgage Insurance may be higher at 3% versus 5%. Again, all conventional borrowers need to meet Fannie Mae and/or Freddie Mac Mortgage Guidelines. 620 credit scores. Private Mortgage Insurance if less than 20% down payment. The maximum loan limit is $548,250. One of the borrowers could not have had ownership of a home in the past 3 years.
Owner Occupant Properties Versus Second And Invest Home Guidelines
Owner occupant properties only qualify for the 3% and 5% down payment conforming loan program:
- Single Family Homes
- PUD
- condominiums
- townhomes
- CO-OP
Benefits Of 97% LTV Conventional Loans
One of the greatest benefits for the 97% LTV Conventional Loan is the 3% down payment.
FHA requires a 3.5% down payment on a home purchase. Although a 0.50% reduction may seem petite, it is big money when talking about a $300,000 home purchase. 0.5% of $300,000 is $1,500 which is not pocket change. There are many instances where borrowers will qualify for conventional loans, but not FHA Loans. For example, for borrowers with high student loan balances, HUD requires 0.50% of the outstanding balance to be used as a hypothetical monthly debt.
Income-Based Repayments are now allowed on FHA loans. Conforming mortgage guidelines always allowed IBR Payments on conventional loans.
For example, a medical doctor who has $400,000 in outstanding student loans:
FHA requires 0.50% of the $400,000 to be used as the borrower’s monthly hypothetical debt. If this medical doctor has an IBR payment of $80.00 per month, FHA will allow Income-Based Repayment. Conventional loans will also allow the $80.00 per month IBR payment to be used as a monthly student loan payment as long as it reflects on credit reports.
Mortgage Included In Chapter 7 Bankruptcy
Homebuyers who had a mortgage included in Chapter 7 Bankruptcy may have no other choice but to go with a conventional loan versus FHA Loan.
Here are conforming guidelines and is why:
If the homeowner had a mortgage included in Chapter 7 Bankruptcy, there is a four-year waiting period after the discharged date of Chapter 7 to qualify for conventional loans. Housing event (foreclosure, deed in lieu, short sale) needs to be finalized. The finalized housing event date does not matter as long as it has been finalized. The mortgage cannot be reformed after Chapter 7 Bankruptcy. Unfortunately, with FHA Loans, if the mortgage was included in Chapter 7, there is a three-year waiting period after the finalization of the housing event. The Chapter 7 Bankruptcy discharged date does not matter. The above reason is why many home buyers may qualify for conforming loans and not FHA Loans.
Conforming Down Payment Guidelines Versus HUD’s Guidelines
There are pros and cons of going with conventional versus FHA Loans:
- FHA minimum credit scores are 580
- Conforming requires 620
- Max 46.9% front end and 56.9% back end DTI to get an approve/eligible per AUS on FHA Loans
- There is no front end DTI requirement for conventional loans, but max DTI is 50% to get AUS Approval
- FHA Loans are assumable, but conforming loans are not
- FHA has a 1.75% upfront mortgage insurance premium, but conforming there is no upfront PMI
- Private mortgage insurance on conforming loans cancels automatically when the LTV reaches 78%
- FHA 0.85% annual mortgage insurance premium is required for the life of the 30-year fixed-rate FHA loan
Contact Gustan Cho Associates Mortgage Group at 800-900-8569 or text us for a faster response to qualify for 97% LTV Conforming Loans for first-time homebuyers. Or email us at gcho@gustancho.com.
