In this blog, we will discuss and cover the debt-to-income ratio for conventional loan guidelines. 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 regarding debt-to-income ratio requirements.
The maximum debt-to-income ratio for conventional loan is 50% back-end. There is no front-end debt-to-income for conventional loan requirements. In the following paragraphs, we will cover the debt-to-income ratio for conventional loan guidelines.
Fannie Mae Debt-To-Income Ratio For Conventional Loan Guidelines
The Federal Housing Finance Agency (FHFA), the agency that governs Fannie Mae and Freddie Mac, has recently increased caps on the debt-to-income ratio for Conventional loan to 50%.
Borrowers of conforming mortgage loans 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. However, if your credit scores exceed 680 FICO, the maximum debt-to-income ratio can go up as high as 50% DTI.
What Are Conventional Loans?
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 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 Freddie Mac Mortgage Guidelines.
The Role of Fannie Mae and Freddie Mac as The Two Mortgage Giants
The role of Fannie Mae and Freddie Mac is to provide stability in the housing market by being the largest buyer of mortgages on the secondary market. Mortgage bankers need to sell the loans they fund to reuse the warehouse to make mortgage loans. Fannie Mae and Freddie Mac will not buy mortgages that do not conform to their standards, lending guidelines, and loan limits set by Fannie Mae and Freddie Mac.
Fannie Mae and Freddie Mac are GSE, a Government Sponsored Enterprise. Fannie Mae and Freddie Mac are the two Government Sponsored Enterprises of GSE. Conventional loans that do not meet Fannie Mae and Freddie Mac mortgage lending guidelines are known as non-conforming loans.
Fannie Mae Conventional Loan Requirements
Conventional loan programs have stricter lending guidelines than government mortgage loans. The debt-to-income ratio for conventional loan programs is capped at 50% DTI.
For FHA-insured mortgage loans, the maximum debt-to-income ratio is 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.
How Do You Calculate Debt To Income Ratio on Conventional Loans?
Debt to income ratio is the total amount of minimum monthly payments a borrower has, including all of the borrower’s minimum 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:
- Principal
- Interest
- Taxes
- Insurance
Any other minimum monthly credit payments are reported on credit bureaus. Taking the total of borrowers’ minimum monthly payments and dividing it by the borrower’s gross monthly income will yield the debt-to-income ratio. The percentage gets 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 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.
Mortgage Rates on FHA versus Conventional Loans
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 can offer lower mortgage rates on government loans.
Down Payment on Conventional Loans
The minimum down payment requirement for a conventional loan is a 5.0% down payment on a home purchase. First-time homebuyers are eligible for conventional financing with a 3% down payment. First Time Home Buyers is a homebuyer who has not owned a home for the past three years.
Fannie Mae 97 LTV Conventional Loans For First-Time Homebuyers
Fannie Mae and Freddie Mac require a 5% down payment on a home purchase for borrowers who owned a home in the past three years. HUD requires a minimum 580 credit score to qualify for a 3.5% down payment home purchase FHA loan. Homebuyers can qualify for FHA loans with credit scores down to 500 FICO.
However, if you have under 580 credit scores and are 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.
2023 Update on Debt-To-Income Ratio For Conventional Loan
Fannie Mae and Freddie Mac have returned the 3% down payment conventional loan home purchase program for first-time homebuyers. Fannie Mae and Freddie Mac offer first-time home buyers the 3% down payment conventional home purchase loan program. First-time homebuyers are home buyers who have not owned a property in the past three years.
Seasoned home buyers who owned a home in the past three 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 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. Gustan Cho Associates is a national mortgage company licensed in multiple states with no lender overlays on government and conventional loans.
Not many conventional lenders will exceed the 50% debt-to-income ratio limit. Gustan Cho Associates has zero debt-to-income ratio overlays for conventional loans, and we go off AUS FINDINGS. The team at Gustan Cho Associates is available seven days a week, on evenings, weekends, and holidays.
December 12, 2022 - 5 min read