Fannie Mae And Freddie Mac Guidelines On Conventional Loans

This Article Is About Fannie Mae And Freddie Mac Guidelines  On Conventional Loans

Fannie Mae And Freddie Mac Guidelines: Conventional loans are not government-backed mortgages.

  • They are not insured and/or guaranteed by any government agency like FHA, VA, USDA loans
  • However, lenders make sure all conventional loans they originate and fund meet Fannie Mae and/or Freddie Mac Agency Guidelines
  • Fannie Mae and Freddie Mac are the two mortgage giants that are the biggest buyers of mortgage loans on the secondary mortgage market
  • Fannie Mae and Freddie Mac only buys loans that conform to their agency mortgage guidelines
  • This is why conventional loans are often referred to as conforming loans
  • Fannie Mae and Freddie Mac will not purchase any loans that do not conform to its agency mortgage guidelines
  • The role of Fannie Mae and Freddie Mac is to provide liquidity in the mortgage markets
  • The way Fannie and Freddie provide liquidity in the mortgage markets is by purchasing conforming loans lenders originate and fund
  • Lenders use their warehouse line of credit to fund loans
  • After the loan is funded, lenders need to sell the loans on the secondary mortgage market
  • After Fannie Mae and/or Freddie Mac purchases the loan on the secondary market of the mortgage banker, the mortgage banker can then pay its warehouse line of credit and originate and fund more loans
  • This is how Fannie Mae and Freddie Mac provides liquidity in the mortgage markets
  • It is mainly because Fannie Mae and Freddie Mac lenders can have liquidity and originate and fund many loans

Conventional loans are referred to as Conforming Loans.

Conforming Loans Defined

What are loans that meet the definition

Fannie Mae and Freddie Mace set the agency mortgage guidelines on Conventional loans.

  • Conventional Loans are called Conforming Loans 
  • This is because they need to conform to Fannie Mae and Freddie Mac Guidelines
  • Borrowers need to meet Fannie Mae and Freddie Mac Guidelines to qualify for Conventional Loans
  • Fannie Mae and Freddie Mac are the two Government Sponsored Enterprises (GSE) that is in charge of implementing mortgage guidelines for Conventional Loans
  • Conventional Loans are called Conforming Loans
  • This is because they need to conform to Fannie Mae and/or Freddie Mac mortgage guidelines

In this article, we will discuss and cover Fannie Mae And Freddie Mac Guidelines On Conventional Loans.

About Conforming Loans

Fannie Mae and Freddie Mac are the two mortgage giants in the United States. Even though both Fannie Mae and Freddie Mac serve the same purpose of providing liquidity in the U.S. mortgage markets, they are two  different institutions:

  • But are both in charge of setting up mortgage guidelines on Conventional Loans
  • The minimum down payment required for conventional loans is 3% down payment for first time home buyers and 5% down payment for Conventional borrowers
  • First time home buyers are people who did not own a property in the past three years
  • Conventional loans are credit-sensitive unlike FHA insured mortgage loans
  • By credit-sensitive, the lower credit scores, the higher mortgage rates
  • Fannie Mae And Freddie Mac do not insure Conventional Loans like HUD insures FHA Loans and VA insuring VA Loans
  • Fannie Mae and Freddie Mac will buy Conventional Loans that conform to their guidelines by private lenders
  • In order for Fannie Mae and Freddie Mac to purchase Conventional Loans, lenders need to make sure they originate meet and conform to all Fannie Mae and Freddie Mac Guidelines
  • Conforming Loans needs to conform to Fannie Mae and/or Freddie Mac Guidelines with regards to credit, income, and other standards

Fannie Mae and Freddie Mac does not deal with consumers but deals with lenders.

HUD Guidelines Compared To Fannie Mae And Freddie Mac Guidelines

To qualify for a 3.5% down payment FHA home purchase loan, the minimum credit scores required is 580 credit score:

  • With FHA loans, the minimum credit score required to qualify is with 500 credit scores
  • A home buyer can qualify for a 10% down payment FHA loan if their credit scores fall between 500 and 579 
  • If credit scores are over 580 borrowers can qualify for a 3.5% down payment FHA insured mortgage loan
  • But the debt to income ratio is capped at 43% for borrowers with under 620 credit scores to get an approve/eligible per automated underwriting system (AUS)

If credit scores are higher than 620, HUD will allow up to 56.9% DTI on the back end and no greater than 46.9% front end DTI to render an approve/eligible per Automated Underwriting System.

VA Guidelines

What are Fannie Mae and Freddie Mac's credit guidelines

Department Of Veteran Affairs (VA) offers 100% financing on VA Loans to veteran borrowers with honorable discharge and Certificate Of Eligibility (COE).

  • There are no minimum credit score requirements on VA Loans
  • There is no debt to income ratio caps on VA Loans
  • However, to get an approve/eligible per AUS Findings, Veteran Borrowers should have at least 580 credit scores
  • Gustan Cho Associates is a mortgage company licensed in multiple states with zero overlays on VA Loans

Gustan Cho Associates has no lender overlays on government and conventional loans. We also offer dozens of non–QM and alternative mortgage loan programs.

Fannie Mae And Freddie Mac Guidelines On Credit Scores

The minimum credit score required for a conventional loan is 620

  • Most mortgage lenders have overlays for borrowers of conventional loans
  • Lender overlays are lending requirements that are above and beyond the minimum agency guidelines of Fannie Mae and/or Freddie Mac
  • Lenders can set higher lending standards that the minimum Fannie/Freddie Agency Guidelines
  • Most lenders will require a higher credit score than the minimum 620 required by Fannie Mae and/or Freddie Mac
  • Many lenders may require a minimum credit score of 640 or higher

To get the best mortgage rates on conventional mortgage loans, a borrower needs a 740 score on conventional loans. The lower the credit score, the higher the mortgage rates.

Conventional Loans After Bankruptcy And Foreclosure

Waiting periods to qualify for conventional loans after a bankruptcy, foreclosure, deed in lieu of foreclosure, and short sale are longer and lending guidelines are tougher than FHA insured mortgage loans.

  • With FHA insured mortgage loans, the waiting period after bankruptcy to qualify for an FHA loan is 2 years from the discharge date of Chapter 7 bankruptcy
  • For conventional loans, the waiting period is 4 years from the discharge date of the Chapter 7 bankruptcy discharge date
  • The waiting period after the recorded  date of foreclosure to qualify for an FHA loan is 3 years
  • The waiting period to qualify for conventional loans after the recorded date of foreclosure is 7 years
  • The waiting period to qualify for FHA insured mortgage loan after a deed in lieu of foreclosure or short sale is three years

A borrower can qualify for conventional loan financing after four years after a deed in lieu of foreclosure or short sale.

Fannie Mae And Freddie Mac Guidelines On Debt To Income Ratio

Debt To Income Ratios Requirements On Conventional Loans

FHA insured mortgage loans maximum debt to income ratio requirements are capped at 46.9% front end debt to income ratio and 56.9% back end debt to income ratio.

  • For conventional loans, Fannie Mae allows up to a 50% DTI
  • Freddie Mac will allow up to 50% Debt To Income Ratio
  • Those with great credit but higher debt to income ratios may need to turn to FHA insured mortgage financing due to the lower debt to income ratio caps of conventional loans

Fannie Mae and Freddie Mac allow Income-Based Repayment (IBR) on student loans on conventional loans. FHA requires 1.0% of the outstanding balance on student loans to be used as monthly hypothetical debt unless the debt is fully amortized on an extended payment plan. Borrowers can request hypothetical fully amortized monthly payments over an extended payment plan (normally 25 years). This number normally turns out to be between 0.50 to 0.60% of the outstanding loan balance. This balance can be used in lieu of the 1.0% if the borrower can get this number and verbiage from the student loan provider.

HUD Versus Fannie Mae And Freddie Mac Guidelines

FHA insured mortgage loans allow for non-occupied co-borrowers and 100% gift funds for their down payments. 

  • Fannie Mae does not allow for non-occupied co-borrowers
  • Freddie Mac does allow co-borrowers to be added to the loan
  • Gift funds are limited on how much gift funds can be gifted to the borrower
  • FHA loans allow for open collections and charge off debts not being paid off
  • Conventional loans frown upon prior bad credit and open collections and charge offs may need to be paid off prior to closing
  • Depends on what Automated Underwriting System conditions for
  • FHA loans do not credit-sensitive like conventional loans
  • Any conventional mortgage loan borrower with lower than 740 credit scores will be paying higher mortgage rates
  • The lower credit scores, the higher your mortgage rates

Home Buyers who need to qualify for government and/or conventional loans with a direct lender with no mortgage overlays, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at [email protected]

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