Conventional Versus Government Loans: Comparisons And Benefits

This ARTICLE Is About Conventional Versus Government Loans: Comparisons And Benefits

There are times when homebuyers need to use Conventional Versus Government Loans.

  • Government loans are for primary residence financing only
  • You cannot purchase a second home and/or investment property using an FHA, VA, USDA loan
  • Government-backed loans are for those homebuyers who intend in using their home purchase as an owner-occupant primary home
  • Conventional loans are often called conforming loans
  • This is because conventional loans need to conform to Fannie Mae and/or Freddie Mac Agency mortgage guidelines
  • Aren’t conventional loans private loans and not backed by a government agency?

Why do private home loans need to conform to Fannie Mae and/or Freddie Mac Agency Mortgage Guidelines if they are not government-backed loans?

What Are The Roles Of Fannie Mae And Freddie Mac

What Are The Roles Of Fannie Mae And Freddie Mac

The reason for this is because Fannie Mae and Freddie Mac are the two giant mortgage companies that purchase mortgage bonds on the secondary market:

  • Mortgage companies will use their warehouse line of credit obtained by banks to originate and fund conventional loans
  • After they fund home mortgages, lenders need to sell the loans they fund on the secondary mortgage bond market
  • Fannie Mae and Freddie Mac are the two mortgage giants lenders sell mortgages
  • However, Fannie Mae and Freddie Mac will not purchase mortgages by lenders if the loans do not conform to their agency guidelines
  • This is why conventional loans are called conforming loans
  • Gustan Cho Associates is a national mortgage company licensed in multiple states with no lender overlays on conventional and government loans

Reasons Why Borrowers Need To Use Conventional Versus Government Loans

Conventional loans are the most popular loan program in the United States.

  • Buyers can purchase primary homes, second homes, and investment properties with conventional loans
  • The minimum down payment on conventional loans is a 3% down payment for first-time homebuyers
  • A first-time homebuyer is defined as someone who did not have ownership in a home in the past three years
  • Otherwise, a 5% down payment is required on conventional loans
  • VA and USDA loans require no down payment

Lenders can finance borrowers with 100% down payment on VA and USDA loans.

VA And USDA Loans Require Zero Down Payment On Home Purchase

VA and USDA loans are two specialty mortgage loan programs that do not require any down payment.

  • VA loans are the best loan program in the nation
  • Zero down payment, no mortgage insurance, no maximum loan limit caps, and low mortgage rates than any other loan program
  • Only properties that are in a designated USDA Rural Development Area are eligible for USDA loans
  • USDA loans do not require any down payment
  • Plus, there are household income restrictions on USDA loans
  • Borrowers who need to finance a second home and/or investment property need to go with conventional loans
  • Borrowers with high student loan debts and are on an income-based repayment (IBR) may need to opt for a conforming versus government loans

Fannie Mae and Freddie Mac will allow IBR payments on conforming loans. This holds true even if the IBR payment is a zero IBR Payment.

Student Loan Guidelines On FHA Versus Conventional Loans

What are the student loan guidelines for FHA versus conventional loans?

Borrowers with high student loan balances often have difficulty qualifying for a home mortgage.

  • FHA loans no longer exempt deferred student loans from debt to income ratio calculations
  • HUD, the parent of FHA require fully amortized monthly payments to be used as legitimate student loan debt when it comes to qualifying for FHA loans
  • HUD does not accept income-based repayment plans on student loan debts
  • If the student loan debt is on an income-based repayment and/or deferment, FHA requires 1.0% of the student loan balance to be used as a monthly hypothetical debt
  • Gustan Cho Associates will allow a letter from the student loan provider stating a monthly hypothetical monthly payment if the borrower is on a hypothetical fully amortized monthly payment plan on an extended-term
  • This written hypothetical monthly payment can be used in debt to income ratio calculations on FHA loans

Fannie Mae and Freddie Mac will allow income-based repayment plans in debt to income ratio calculations. This holds true even though the borrower has a zero IBR payment.

Conventional Versus Government Loans: VA Home Mortgages

VA loans are the best home mortgage program in the nation. However, VA loans have certain guidelines versus conforming loans when it comes to student loan guidelines. One great aspect of VA loans is it exempts deferred student loans from debt to income ratio calculations as long as it has been deferred for longer than 12 months.

Here is how the student loan guidelines on VA loans are stated:

  • Deferred student loans that have been deferred longer than 12 months are exempt from debt to income ratio calculations
  • Income-based repayment (IBR) does not count on VA loans
  • If the loan is on an IBR repayment and/or non-deferred for longer than 12 months, then the VA requires mortgage underwriters to take 5% of the outstanding student loan balance and divide that figure by 12
  • The resulting figure is used as a monthly hypothetical debt when calculating the borrower’s debt to income ratios

There are instances when borrowers with very high student loan balances need to use conventional versus VA loans. This holds true when the borrower has a zero IBR payment on their student loans.

Below is a chart on a comparison between conventional versus VA loans on loan terms and costs:

What are the terms and costs of the loan

There are many benefits of VA loans. There is no down payment required on VA loans. There is no monthly mortgage insurance and mortgage rates are lower than conventional loans. There are no maximum loan limits on VA mortgages. Due to the government guarantee, lenders are more than eager to offer 100% financing on VA loans at stellar low mortgage rates. To start the mortgage application process with a lender with no overlays on VA loans, please give us at Gustan Cho Associates a call at 262-716-8151 or text us for a faster response. Or email us at gcho@gustancho.com. The team at GCA Mortgage Group is available 7 days a week, evenings, weekends, and holidays.

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