Conventional Loan With Bad Credit And Low Credit Scores

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Conventional Loan With Bad Credit And Low Credit Scores

This BLOG On Qualifying For Conventional Loan With Bad Credit And Low Credit Scores Was UPDATED On July 28th, 2018

Conventional Loans are called conforming loans because they need to conform to Fannie Mae and/or Freddie Mac mortgage lending guidelines.

  • Fannie Mae and Freddie Mac have their mortgage guidelines on conventional loans
  • Borrowers need to meet those conventional lending guidelines in order to qualify
  • Conventional Loans have tougher guidelines than government loans such as FHA Loans, VA Loans, USDA Loans
  • This is because conventional loans are not insured by a government agency such as the following:
    • Federal Housing Administration
    • Department of Veteran Affairs
    • USDA
  • Conventional Loans are extremely credit score sensitive
  • The lower the borrower’s credit scores are, the higher the mortgage rates are
  • Lower credit scores are viewed as riskier borrowers
  • So in order for borrowers to get the best rates, they need higher credit scores and lower loan to values
  • However, borrowers can qualify for conventional loan with bad credit
  • Home buyers seeking the best conventional mortgage rates will need credit scores of at least 740
  • Debt to income ratio also is a factor on conforming mortgage rates
  • Borrowers need at least 20% equity in home to get the par rates on conventional loans
  • Any credit scores lower then 740 will get pricing adjustments also known as LLPA (LOAN LEVEL PRICING ADJUSTMENTS)
  • Minimum credit scores to qualify for conventional loans is 620
  • A 620 credit score is considered a very low credit score for conventional loans

Cases Where Conventional Loans Are The Only Option

As mentioned earlier, home buyers can qualify for conventional loan with bad credit

  • However, the chances are that you will be paying a very high interest rate
  • Here is a hypothetical case scenario:
    •  prime borrower
    • prime borrowers are borrowers with at least a 740 credit score and 20% down payment
    • get quoted a conventional mortgage rate of 4.0%
    • a borrower seeking a conventional loan with bad credit, example would be 620 credit score may be quoted a rate of 5.0%
    • These conventional mortgage rates are not real quotes and are just for illustration purposes
  • FHA Loans are not credit sensitive like conventional loans
  • This is because government loans are insured by the government against borrower’s default on the loan
  • Conventional loans are not
  • Cases where borrowers need to go with conventional loans instead of other types of loans such as FHA Loans, VA Loans, USDA Loans are home buyers who are purchasing second homes, vacation homes, or investment homes
  • FHA Loans, VA Loans, and USDA Loans are only for primary residences
  • Home buyers needs to only purchase owner occupant homes
  • Other cases where home buyers need to go with conventional loans instead of FHA Loans are when they want to purchase a condominium and the condominium complex is not FHA Condo approved
  • They need to go with conventional loans

How Lower Credit Scores Hurt Borrowers With Higher DTI

Most conforming borrowers will have a very difficult time qualifying with 50% debt to income ratios. Fannie Mae and Freddie Mac now allows up to 50% debt to income ratios. However, most private mortgage insurance companies will not insure borrowers over 45% debt to income ratios unless their credit scores are over 700. This puts a drain to many borrowers with higher debt to income ratios and under 700 credit scores. Great news is that Gustan Cho Associates has investors that will allow conventional borrowers up to 50% debt to income ratios with under 700 credit scores.

Requirements On Conventional Loan With Bad Credit

To qualify for conventional loan with bad credit, borrowers needs to meet conforming mortgage guidelines:

Here are the basics in qualifying for conventional loans:

  • Have at least a 620 credit score
  • Been timely on their monthly credit obligations for the past 12 months
  • 3% down payment for first time home buyers and 5% down payment for seasoned home buyers
  • The maximum debt to income ratios required is no greater than 50%
  • Minimum waiting period after Chapter 7 Bankruptcy is 4 years after discharged date
  • At least 4 years out of deed in lieu of foreclosure
  • At least 4 years out of short sale
  • At least 7 years out of foreclosure
  • Borrowers with outstanding judgments and/or tax liens can qualify with written payment agreement with the judgment creditor and/or Internal Revenue Service and have at least three months payment history

Home buyers who need to qualify for conforming or government loans with a direct lender with no overlays, please contact Gustan Cho Associates at 262-716-8151 or text us for faster response. We are direct lenders with no lender overlays on government and conventional loans.

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