Conventional Loan After Bankruptcy Requirements And Guidelines

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Conventional Loan After Bankruptcy Requirements And Guidelines

This BLOG On Conventional Loan After Bankruptcy Requirements Was UPDATED On February 18th, 2019

Conventional Loan After Bankruptcy Requirements And Guidelines

Conventional Loan After Bankruptcy Requirements

There are lending guidelines in qualifying for a conventional loan after bankruptcy requirements that home buyers need to meet.

  • Fannie Mae and Freddie Mac are the two mortgage giants that set conventional lending guidelines for conventional loans
  • To qualify for a conventional loan after a Chapter 7 Bankruptcy, borrowers need to meet mandatory waiting period after the discharged date
  • There is a four year waiting period after the Chapter 7 Bankruptcy discharge date to qualify for Conventional Loans
  • There is a two-year waiting period to qualify for a conventional loan after a Chapter 13 Bankruptcy discharge
  • Many lenders want borrowers to have re-established credit after bankruptcy and/or foreclosure
  • Besides the mandatory waiting period after a bankruptcy, there are other rules and standards borrowers needs to meet in qualifying for a conventional loan after bankruptcy
  •  Minimum credit score requirements to qualify for a conventional loan is 620 FICO credit scores
  • Lenders do not want to see any late payments by borrowers after their bankruptcy discharge date
  • This is for both Chapter 7 Bankruptcy and Chapter 13 Bankruptcy

Importance Of Credit Scores

Importance Of Credit Scores

The way Conventional Loans work is different than FHA Loans.

  • Credit Scores have a huge impact on mortgage interest rates on Conventional Loans unlike with FHA Loans
  • FHA Loans are insured by the Federal Housing Administration against borrower’s default
  • If homeowners defaults on FHA Loans, FHA will insure and guarantee the lender against loss
  • Due to the FHA mortgage insurance, FHA mortgage rates are lower than Conventional rates
  • With FHA Loans, as long as borrowers have a credit score of 640 or higher, the borrower will most likely get the best FHA rates
  • The down payment has no impact on FHA mortgage interest rates
  • However, with Conventional Loans, it is different

Conventional Loans Versus FHA Loans

Conventional Loans Versus FHA Loans

FHA Loans are government loans. FHA Loans are guaranteed by HUD in the event borrowers were to default and the property goes into foreclosure. Due to this guarantee, banks and private lenders feel secure and safe with originating and funding FHA Loans. However, Conventional Loans are not guaranteed by the government and banks are more careful when it comes to assessing risk.

  • Factors that affect Conventional rates are the following:
    • Borrowers credit scores
    • Down payment
    • Type of property
  • A prime borrower with Conventional Loans are the following borrowers:
    • 740 credit scores or higher
    • 20% down payment on a home purchase or a homeowner who has at least an 80% loan to value
  • Fannie Mae and Freddie Mac are the two institutions that set standards and mortgage guidelines on Conventional Loans
  • Conventional Loans are not guaranteed against borrower’s default by Fannie Mae or Freddie Mac

Conventional Loans are called conforming loans because they need to conform to Fannie Mae and/or Freddie Mac Mortgage Guidelines. In order for lenders to be able to sell conventional loans on the secondary market to Fannie/Freddie, the loans they originate and fund needs to conform to Fannie/Freddie Guidelines. This is why lenders following conforming guidelines.

Private Mortgage Insurance Versus FHA MIP

Private Mortgage Insurance Versus FHA MIP

  • Private Mortgage Insurance is required on conventional loans with over 80% loan to value
  • FHA Loans are insured with FHA against borrower’s default
  • FHA requires the borrower to have FHA mortgage insurance premium throughout the life of a 30 year fixed rate FHA Loan
  • This is on FHA Loans no matter what the loan to value is
  • With Conventional Loans, private mortgage insurance is not required for homeowners who have at least an 80% loan to value or lower
  • However, it is required for homeowners who have less than 20% equity in their homes

Does Bankruptcy And Prior Bad Credit Affect Mortgage Rates

Does Bankruptcy And Prior Bad Credit Affect Mortgage Rates

A prior bankruptcy has no impact on conventional rates.

  • Case Scenario:
    • Borrower A,  with a 740 credit score and 20% down payment
    • Borrower B, who has the exact 740 credit score as well as a 20% down payment but has a prior bankruptcy
    • Both Borrowers A & B will get the same conventional mortgage interest rates
    • The borrower with the prior bankruptcy will not get penalized due to their prior bankruptcy

Qualifying For Conventional Loan With Mortgage Part Of Bankruptcy

Qualifying For Conventional Loan With Mortgage Part Of Bankruptcy

If a person had a mortgage part of their Chapter 7 Bankruptcy, the mandatory waiting period to qualify for a conventional loan is four years from the date of the Chapter 7 Bankruptcy discharge date. Even though the foreclosure is not recorded after the discharge date of their Chapter 7 Bankruptcy.

  • The foreclosure can be recorded at a much later date than the Bankruptcy discharge date and that will not matter
  • Under Fannie Mae and Freddie Mac conventional mortgage guidelines, the waiting period starts from the discharge date of the Chapter 7 Bankruptcy
  • The mortgage cannot be reaffirmed
  • The housing event needs to be finalized by the following:
    • Foreclosure
    • Deed In Lieu Of Foreclosure
    • Short Sale

Many borrowers can now qualify for Conventional Loans but not FHA Loans if they had a mortgage part of their Chapter 7 Bankruptcy. With government loans, the waiting period start date is the date the deed has been transferred out of their name after the discharged date of Chapter 7.

Conventional Loan After Bankruptcy Requirements And Qualifying With Lender With No Overlays

Conventional Loan After Bankruptcy Requirements And Qualifying With Lender With No Overlays

Home Buyers or Homeowners who need to qualify for a mortgage with a direct lender with no overlays on government and/or conventional loans can contact us at The Gustan Cho Team at Loan Cabin at 262-716-8151 or text us for faster response. Or email us at gcho@loancabin.com. We are available 7 days a week, evenings, weekends, and holidays.

This BLOG On Conventional Loan After Bankruptcy Requirements Was UPDATED On February 18th, 2019

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