This BLOG On Debt To Income Ratio For Conventional Loan Mortgage Guidelines Was UPDATED And PUBLISHED On November 9th, 2020
A conventional loan is any mortgage loan that is not insured nor guaranteed by the United States Federal Government.
- Conventional Loans have tougher lending guidelines than VA and FHA Loans with regards to debt to income ratio requirements
- The Federal Housing Finance Agency (FHFA), the agency that governs Fannie Mae and Freddie Mac has recently increase caps on debt to income ratio for Conventional Loan to 50%
- Conforming Loan Borrowers can go up to 50% DTI to get an approve/eligible per Automated Underwriting System Approval
- Before, the max debt to income ratio for a conventional loan was capped at 45% DTI
In this article, we will cover and discuss debt to income ratio guidelines on Conventional Loans.
What Are Conventional Loans
In order for lenders to be able to sell conventional loans they fund on the secondary market, the loans they originate and fund need to meet Fannie Mae and/or Freddie Mac Guidelines:
- A conventional loan is also known as a conforming loan
- Conventional Loans are also called conforming loans because they need to conform to Fannie Mae and/or Freddie Mac Mortgage Guidelines
- Conforms to the standards, lending guidelines and loan limits set by Fannie Mae and Freddie Mac
- Fannie Mae and Freddie Mac are GSE, which stands for a Government Sponsored Enterprise
- Fannie Mae and Freddie Mac are the two Government Sponsored Enterprises, GSE
Conventional loans that do not meet Fannie Mae and/or Freddie Mac mortgage lending guidelines are known as non-conforming loans.
Conventional Loan Requirements
Conventional loan programs have stricter lending guidelines than government mortgage loans.
- Debt to income ratio for conventional loan programs are capped at 50% DTI
- For FHA insured mortgage loans, the maximum debt to income ratios are 46.9% front end DTI and 56.9% back end DTI
- There is no front end debt to income ratio for a conventional loan
As long as borrowers can meet the 50% debt to income ratio for conventional loan requirements, the front end debt to income ratio does not matter.
What Is Debt To Income Ratio?
Debt to income ratio is the total amount of minimum monthly payments a borrower has which includes all of borrower’s minimum monthly payments divided by monthly gross income.
The following are included as monthly borrower debts:
- Credit card payments
- Auto payments
- Student loan payments
- Installment payments
- Child support payments
Proposed monthly housing payment that consists of:
Any other minimum monthly credit payments reporting on credit bureaus.
Take the total of borrowers minimum monthly payments and divide by the borrower’s gross monthly income will yield the debt to income ratio. The percentage get is the debt to income ratio.
Conventional Loan Lending Guidelines
Conventional loan programs have higher credit standards than FHA insured mortgage programs:
- To qualify for a 3.5% down payment FHA insured mortgage loan, the minimum credit score required is 580
- However, to qualify for a conventional loan, the loan applicant needs a minimum credit score of at least a 620
- However, a 620 credit score is normally considered a poor credit score for a conventional loan
- Those with a low credit score will most likely pay a much higher mortgage rate on a conventional loan
- With FHA loans, as long as borrowers have a 640 or higher credit score, borrowers will most likely get the best FHA mortgage rate
- For a conventional loan applicant to get the best available conventional mortgage rate, they would need a credit score higher than 740
Due to the government guarantee, lenders have less risk with FHA and VA Loans. Lenders are able to offer lower mortgage rates on government loans.
Minimum Down Payment Requirements On Conventional Loans
The minimum down payment requirement for a conventional loan is a 5.0% down payment on a home purchase.
- First time home buyers are eligible for conventional financing with 3% down payment
- First Time Home Buyers is defined as a home buyer who had no ownership in a home for the past three years
- For borrowers who had ownership in a home in the past three years, Fannie Mae and Freddie Mac require a 5% down payment on a home purchase
- HUD requires a minimum 580 credit score to qualify for a 3.5% down payment home purchase FHA loan
- Homebuyers can qualify for an FHA loans with credit scores down to 500 FICO
- However, if you have under 580 credit scores and down to a 500 FICO, HUD requires a 10% down payment
- VA loans and USDA loans do not require any down payment on a home purchase
The down payment on a home purchase can be gifted.
2021 Update On Minimum Down Payment And Debt To Income Ratio For Conventional Loan
Fannie Mae and Freddie Mac has brought back the 3% down payment conventional loan home purchase program for first time home buyers.
- Fannie Mae and Freddie Mac offer the 3% down payment conventional home purchase loan program to first time home buyers
- First time homebuyers are defined as home buyers who had not owned a property in the past three years
Seasoned homebuyers who had ownership in a home in the past 3 years require a 5% down payment on conventional loans. Private mortgage insurance is required on all conventional loans with higher than 80% loan to value.
Qualifying With High Debt To Income Ratio For Conventional Loan
Home Buyers who need to qualify for conventional loans with high debt to income ratios can contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at firstname.lastname@example.org. Gustan Cho Associates is a national mortgage company licensed in multiple states with no lender overlays on government and conventional loans. Not too many conventional lenders will go to the 50% debt to income ratio limit. Gustan Cho Associates has zero overlays on debt to income ratio for conventional loans and we just go off AUS FINDINGS. The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.