Conforming Underwriting Guidelines On Conventional Loans

Gustan Cho Associates
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Conforming Underwriting Guidelines On Conventional Loans

This BLOG On Conforming Underwriting Guidelines On Conventional Loans Was PUBLISHED On June 8th, 2019

Conforming Underwriting Guidelines
Gustan Cho Associates

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/or guarantees conforming loans
  • Many ask why conventional loans need to 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 knowns as Government Sponsored Enterprises (GSE)
  • In order for Fannie Mae and/or Freddie Mac to purchase mortgages by lenders on the secondary market, the mortgage needs to conform to Fannie Mae and/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 and/or Freddie Mac
  • Once Fannie/Freddie purchases the loan by lenders, the lender will pay off their warehouse lines of credit so they can originate more loans
  • In order for Fannie and/or Freddie to purchase loans, lenders need to follow and meet Conforming Underwriting Guidelines

In this blog, we will discuss Conforming Underwriting Guidelines and cases where borrowers need to go with Conventional versus FHA Loans.

Cases Where Borrowers Need To Choose Conforming Versus FHA Loans

Cases Where Borrowers Need To Choose Conforming Versus FHA Loans
Gustan Cho Associates

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.

Here are the instances when borrowers need to go with Conforming Versus FHA Loans:

  • Borrowers with high student loan balances
  • Borrowers in community property states where a non-borrowing spouse has a lot of monthly debts
  • Borrowers who had mortgage included in bankruptcy and the housing event did not get recorded until recently
  • Borrowers who have non-occupant borrowers that are not related by blood, marriage, law

Borrowers With High Student Loan Balances

Borrowers With High Student Loan Balances
Gustan Cho Associates

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 amortizing

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 are calculating their debt to income ratios.

Conforming Underwriting Guidelines In Community Property States

Conforming Underwriting Guidelines In Community Property States
Gustan Cho Associates

There are 9 community property states in the United States.

  • Per Conforming Underwriting Guidelines, non-borrowing spouse’s monthly debts in community property states do not have to be included when mortgage underwriters are calculating borrower’s debt to income ratios
  • This does not apply on FHA Loans

Under HUD Guidelines, all monthly debt obligations on non-borrowing spouse will count on FHA Loans.

Mortgage Included In Bankruptcy

Mortgage Included In Bankruptcy
Gustan Cho Associates

Borrowers who had 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, 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-Borrower Conforming Underwriting Guidelines
Gustan Cho Associates

Non-Occupant Co-Borrowers do not have to be related to the main borrower by law, marriage, 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 who have questions on this blog and/or any other mortgage topic, please contact us at Gustan Cho Associates at 262-716-8151 or text us for faster response. Or email us at gcho@loancabin.com.

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