This guide covers conforming loan requirements and guidelines on primary, second, and investment homes. Conforming loan requirements for 2023, for the most part, are the same as in 2022, with no major important changes. The last major change in conforming loan requirements was the two-year waiting period after a short sale and deed-in-lieu of foreclosure with a 20% down payment was no longer in effect.

For borrowers who have a mortgage part of bankruptcy, the waiting period is four years from the discharge date of the bankruptcy. The recorded date of the foreclosure, even if the foreclosure is recorded at a later date after the bankruptcy, does not matter.

The housing event (foreclosure, deed-in-lieu of foreclosure, short sale) needs to be finalized, but the age of the date does not matter. In this article, we will discuss and cover conforming loan requirements and guidelines on purchase and refinance transactions.

What are Conforming Loans?

Conforming loans get their name because they must conform to the underwriting guidelines of Freddie Mac and Fannie Mae. These two huge corporations buy loans from mortgage lenders, group them into pools of similar loans, and sell shares called mortgage-backed securities or MBS) in those pools to investors. It’s very similar to the way a company sells shares on the stock market.

The reason the loans must conform to these guidelines is so that one loan will be pretty much like another. An investor who buys a share of these loans must be confident that her share is as good as anyone else’s.

Note that conforming loans are not the same as conventional loans. Conventional loans are all mortgages that are not backed by the federal government. Any loan that is not a VA, FHA or USDA mortgage is a conventional loan. All conforming loans are conventional loans.

But all conventional loans are not conforming loans. There are many lenders offering mortgages that don’t meet Fannie Mae or Freddie Mac guidelines. They might be larger than the limits of conforming loans, or have more liberal underwriting guidelines. Conventional loans that don’t meet Fannie Mae or Freddie Mac guidelines are called non-conforming loans.

Conforming Mortgage Minimum Down Payment

The minimum down payment for a conforming mortgage depends on the borrower’s credit score, debt-to-income (DTI) ratio, loan type, and property type.

• DTI is your total debt payments, including your potential housing payment, divided by your monthly gross (before tax) income.
• The loan type refers to the term (for instance 15 or 30 years) and the interest rate (fixed or adjustable)
• The property type refers to the construction (single-family traditional build, manufactured home, multi-unit property, and condominium or co-op) and the use (primary residence, second home or investment property)

The matrix below shows how the combination of credit score, reserves and DTI impact the required down payment.

Down Payment Requirements on Conforming Loans

All mortgage programs require a down payment except for VA and USDA loans. The 3% down payment for first-time home buyers is now available on conforming loans. Homebuyers can qualify for a conventional loan with a 3% down payment if they are first-time homebuyers. Per Fannie Mae and Freddie Mac Guidelines, a first-time homebuyer is someone who did not own a home for at least three years.

Credit Score Conforming Loan Requirements

The minimum credit score to qualify for conventional loans is 620. Conventional mortgage rates are priced on several factors. Here are the loan-level pricing adjustments on conforming loans:

• credit scores
• type of property
• loan-to-value
• debt-to-income ratio
• loan amount
• county and state of the subject property

To get the best conventional mortgage rates, borrowers need the following:

• 740 credit score
• 75% loan-to-value
• The property needs to be a single-family home
• Low debt-to-income ratio

The lower borrower’s credit score, the more lender views them as riskier borrowers. If lenders take on risks, mortgage rates will be higher. Borrowers with the bare minimum 620 credit score will most likely get the highest rates on conventional loans.

Conforming Loan After Short Sale and Deed-in-Lieu of Foreclosure

The two-year waiting period after a short sale and deed-in-lieu of foreclosure with a 20% down payment to qualify for a conventional loan is no longer in effect. The new conforming loan requirements to qualify after a short sale and deed-in-lieu of foreclosure have been extended to 4 years. The recorded date of the deed-in-lieu of foreclosure needs to be four years. Four years from the short sale date, reflected in the HUD Settlement Statement with a 5% down payment.

Conforming Loan Requirements With Mortgage Part of Bankruptcy

For borrowers with a mortgage or mortgage as part of bankruptcy, the waiting period to qualify for a conventional loan is four years from the bankruptcy discharge date. Not the recorded date of foreclosure. Many homebuyers who had a mortgage part of bankruptcy can now qualify for a conventional loan four years from the discharge date of the Chapter 7 Bankruptcy. Do not worry about going by the recorded foreclosure date, deed in lieu, or short sale. Mortgages cannot be reaffirmed after bankruptcy. The housing Event needs to be finalized.

Waiting Period After Chapter 13 Bankruptcy

Conventional loan requirements after Chapter 13 Bankruptcy is a 2-year waiting period from the discharge date of Chapter 13 Bankruptcy. There is a four-year waiting period from the dismissal date of the Chapter 13 Bankruptcy to qualify for conforming loans. Some consumers file for Chapter 13 Bankruptcy, where they get the Chapter 13 Bankruptcy dismissed and do not complete the repayment program. Whether it was a voluntary dismissal or the Chapter 13 dismissal was due to non-payment, Fannie Mae and Freddie Mac require a four-year wait period after dismissal.

Conforming Loan Requirements After Foreclosure

Conventional loan requirements after a foreclosure are seven years from the recorded foreclosure date. Conforming loan requirements after a foreclosure differs from qualifying for a conventional loan after a deed-in-lieu of foreclosure or short sale.

With FHA loans, the waiting period to qualify for an FHA loan is three years after the recorded date of the foreclosure, deed-in-lieu of foreclosure, and the recorded date of their short sale, which is reflected on their HUD Settlement Statement.

The waiting period after bankruptcy is two years from the discharge date of the Chapter 7 Bankruptcy for an FHA loan. However, Fannie Mae and Freddie Mac have a longer waiting period after a foreclosure than they do after a deed-in-lieu of foreclosure or short sale.

Conforming Guidelines on Student Loans

One great advantage of conforming loan requirements on student loans is that Fannie Mae and Freddie Mac allow Income-Based Repayment (IBR) that reports on consumer credit reports to be used as monthly student loan debts. This is not the case with other loan programs. For example, if a physician with a $300,000 outstanding student loan balance and has an IBR Payment of $80 per month, that $80 per month IBR payment can be used as the monthly student loan debt on conventional loans. Borrowers who need to qualify for conforming loans with a lender with no overlays, please get in touch with us at Gustan Cho Associates Mortgage Group at 800-900-8569 or text us for a faster response. Borrowers can also email us their case scenario questions to gcho@gustancho.com. We are available evenings, weekends, and holidays seven days a week.

Benefits of Conforming Mortgages

Conforming mortgages are widely available and easy to shop for. That keeps interest rates low. Conforming mortgage lenders use automated underwriting systems (AUS) and applicants can often get an underwriting decision in minutes.

There are many loan programs including special ones with 3% down payments and discounted mortgage insurance for eligible applicants.  You can also find programs for manufactured homes, home construction, second homes, and investment property.

Conforming mortgage loan limits are often higher than those of FHA mortgages.

Mortgage Insurance Guidelines 

Borrowers who put less than 20% down when buying a home must purchase private mortgage insurance (PMI) when they borrow with a conforming mortgage.

The mortgage insurance premium depends on the loan type, down payment, and borrower credit score. Mortgage insurance for government-backed loans, on the other hand, costs the same regardless of credit score. Borrowers with good credit can usually pay less (sometimes a LOT less) when they finance with a conforming loan instead of a government-backed loan.

In addition, government-backed loans require a funding fee or mortgage insurance for all borrowers. No matter how big the down payment. But conforming loans do not require mortgage insurance for down payments of at least 20%.

Borrowers can choose to pay their PMI monthly, or they can pay an upfront lump sum and keep the monthly payment lower. There is also an option to pay a higher interest rate and let the lender pay your mortgage insurance for you. That’s called lender Paid Mortgage Insurance or LPMI.