What Are Conventional Loans Versus Government-Backed Mortgages
This Article Covers What Are Conventional Loans Versus Government-Backed Mortgages:
Conventional loans are the most popular loan program in the United States. Owner-occupant primary homes, second homes, and investment properties are eligible for conventional loan financing. Owner-occupant primary one to four-unit homes is eligible for government-backed loans. You cannot finance second homes or two to four-unit investment homes with government loans.
There are three different types of government-backed mortgages:
- FHA loans backed by the United States Department of Housing and Urban Development
- VA loans backed by the U.S. Department of Veterans Affairs
- USDA loans backed by the U.S. Department of Agriculture Rural Development Program
Conventional loans are not guaranteed by any government agency. Therefore, it has stricter credit and income requirements and guidelines than government-backed mortgages. Borrowers have more options on conventional versus government-backed loans. Loan limits are generally higher on conventional loans. Borrowers can also qualify for warrantable condos with conventional loans where condos need to be agency-approved on government loans.
Conventional loans allow financing on second homes and one to four-unit residentially zoned investment homes. It is important to understand Fannie Mae and Freddie Mac Agency Guidelines versus lender overlays on conventional loans. We will cover what lender overlays on conventional loans extensively in the following paragraphs. Gustan Cho Associates has no lender overlays on conventional loans.
In this article, we will discuss and cover the difference between Conventional Loans Versus Government-Backed Mortgages. We will also cover the benefits of Conventional Loans Versus Government-Backed Mortgages.
Why Are Conventional Loans Often Referred To As Conforming Loans
Conventional loans are home mortgages that are not backed by a government agency like FHA, VA, and USDA loans are. Fannie Mae and Freddie Mac is not a government agency. Fannie and Freddie are the two mortgage giants and are government-sponsored enterprises or commonly referred to as GSE. Fannie Mae and Freddie Mac are the GSE that sets the lending guidelines on conventional loans. Fannie and Freddie have minimum lending requirements which we will go over later in the following paragraphs.
Why do conventional loans have lending guidelines such as minimum credit score requirements, debt to income ratio caps, waiting period after bankruptcy and/or foreclosure, and other requirements if they are not federally regulated? This is a great question.
Conventional loans are often referred to as conforming loans. Why are they called conforming loans? Conventional loans are called conforming loans because they need to conform to Fannie Mae and/or Freddie Mac lending guidelines. Fannie Mae and Freddie Mac are the two mortgage giants in the United States. Both Fannie and Freddie are government-sponsored enterprises or GSE.
The Role of Fannie Mae and Freddie Mac
The role of Fannie Mae and Freddie Mac is to purchase mortgages and provide liquidity in the mortgage markets.
Fannie and Freddie only purchase mortgages that conform to their lending standards and guidelines. Lenders use their warehouse lines of credit to fund conventional loans. However, lenders do not want to hold the loans they fund. Mortgage lenders will sell the loans they fund using their warehouse line of credit on the secondary mortgage market. They may sell it to larger mortgage bankers and/or correspondent lenders.
Ultimately, the larger mortgage bankers and/or correspondent lenders will package these loans they purchase and sell them to Fannie and Freddie which are the largest buyers of mortgage loans on the secondary market. This is why lenders will make sure the conventional loans they originate and fund conform to Fannie Mae and/or Freddie Mac agency guidelines.
Borrowers Who Should Choose Conventional Versus Government Loans
Borrowers with stronger credit and income profiles should opt for conventional versus government loans.
Homebuyers with higher credit scores and great credit will benefit from conventional versus government-backed loans. The minimum down payment required on conventional loans for first-time homebuyers is a 3% down payment. Fannie Mae and Freddie Mac define a first-time homebuyer as a buyer who did not have any ownership of a home in the past three years. Otherwise, the minimum down payment required on a home purchase with a conventional loan is a 5% down payment.
Private mortgage insurance is required on all conventional loans if the loan to value is greater than 80% LTV. Mortgage Insurance on conventional loans is not a fixed rate like FHA loans. PMI rates depend on various factors such as the borrower’s credit scores, the LTV, the property type, and other factors.
Differences Between Conventional Loans Versus Government-Backed Mortgages
As mentioned earlier, government loans are for owner-occupant primary home mortgages only.
You cannot finance second homes, and/or investment homes with government loans. Borrowers can finance owner-occupant primary homes, second homes, and investment properties with conventional loans. There is no government guarantee and/or backing on conventional loans. Lenders need to count on private mortgage insurance on conventional loans. FHA, VA, USDA loans are backed with government-backed mortgage insurance which is paid by the borrower and is at a fixed rate.
Premiums on private mortgage insurance are vary depending on the borrower’s credit/income profile and other risk factors.
Fannie Mae and Freddie Mac GSE Agency Guidelines on Conventional Mortgages
The list below is the minimum lending guidelines on conventional loans. There are conforming and non-conforming conventional loans. The maximum loan limit on conforming conventional loans for 2021 is $548,250 on single-family homes. Non-conforming conventional loans for single-family homes also referred to as high-balance conforming loans, are capped at $822,375 for 2021. There are many high-cost areas such as many counties in California, Alaska, and Hawaii falls into the high-balance conventional loan limits. It is important borrowers get an approve/eligible per automated underwriting system on conventional loans:
- The minimum credit score to qualify for conventional loans is 620 FICO
- 3% down payment on a home purchase for first-time homebuyers and 5% down payment for seasoned homebuyers
- Fannie Mae and Freddie Mac define first-time homebuyers as a buyer who had no interest in any homeownership in the past three years
- Borrowers need to wait a four-year waiting period after the Chapter 7 Bankruptcy discharged date to qualify for a conventional loan
- There is a two-year waiting period after the Chapter 13 Bankruptcy discharged date to qualify for a conventional loan
- The waiting period is four-years after the Chapter 13 Bankruptcy dismissal date to qualify for a conventional loan
- There is a four year waiting period after a deed in lieu of foreclosure and/or short sale to qualify for a conventional loan
- The waiting period is seven years after a standard foreclosure to qualify for a conventional loan
For additional lending requirements on conventional loans, please feel free to contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at [email protected] The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays. GCA Mortgage has no lender overlays on conventional loans.