Freddie Mac Bankruptcy Guidelines on Conventional Loans

In this blog, we will discuss and cover Freddie Mac bankruptcy guidelines on conventional loans. Mortgage borrowers can qualify for government and conventional loans after bankruptcy. However, government and conventional loans require a waiting period after bankruptcy. The waiting period requirements depend on the individual mortgage program. Gustan Cho Associates offer non-QM mortgages one day out of bankruptcy.

Is Freddie Mac a Conventional Loan?

Yes, Freddie Mac offers conventional loans. Freddie Mac is one of the government-sponsored enterprises (GSEs) along with Fannie Mae. They both operate in the secondary mortgage market, purchasing and guaranteeing mortgages originated by lenders. Conventional loans refer to those not insured or guaranteed by the government, such as FHA or VA loans. Instead, they follow guidelines Freddie Mac or Fannie Mae set, making them conforming loans. These loans typically have stricter credit and down payment requirements than government-backed loans.

What are the Guidelines for Freddie Mac DTI?

Freddie Mac has specific guidelines regarding debt-to-income (DTI) ratios for borrowers applying for conventional loans. Loan officers use these guidelines to evaluate borrowers’ capacity to handle monthly mortgage payments based on income and current debt obligations. Here are some key points about Freddie Mac’s DTI guidelines:

1. Maximum DTI Ratio: The maximum allowable DTI ratio for most conventional loans backed by Freddie Mac is typically 45%. This means your total monthly debt payments (including your mortgage payment) should be at most 45% of your gross monthly income.
2. Exceptions and Flexibility: In some cases, Freddie Mac may allow DTI ratios higher than 45%, especially for borrowers with strong credit profiles and compensating factors such as significant cash reserves or a high credit score.
3. Automated Underwriting System (AUS): Freddie Mac uses an Automated Underwriting System (AUS) known as Loan Product Advisor (LPA) to evaluate loan applications. To determine loan eligibility and risk, the AUS considers various factors, including credit score, down payment, income, assets, and DTI ratio.
4. Manual Underwriting: In certain situations where the borrower’s DTI ratio exceeds the standard limits, or there are other risk factors, manual underwriting may be required. Manual underwriting involves a more detailed assessment of the borrower’s financial situation and may have stricter DTI ratio requirements.
5. Reserve Requirements: Freddie Mac may also consider the borrower’s reserves (savings and assets) when evaluating DTI ratios. Higher reserves can sometimes offset a higher DTI ratio.
6. Borrower Education: Freddie Mac encourages lenders to educate and counsel borrowers, especially first-time homebuyers, to help them understand and manage their debt obligations responsibly.

Please be aware that these guidelines may vary depending on the loan program, the lender’s overlays, and other factors. Borrowers should work closely with their lenders to understand their DTI requirements and options.

Qualifying for Non-QM Loans One Day out of Bankruptcy with No Waiting Period Requirements

Homebuyers can qualify for non-QM loans one day out of bankruptcy. However, a 30% down payment is required on non-QM loans one day out of bankruptcy. Just waiting out the waiting period after bankruptcy does not guarantee borrowers to qualify for a mortgage. To get an approve/eligible per automated underwriting system (AUS), borrowers need timely payments after bankruptcy. No late payments after bankruptcy. Rebuilt and reestablished credit after bankruptcy is very important. Secured credit cards are the easiest and fastest tool for re-establishing your credit after bankruptcy. We highly recommend three to five secured credit cards with at least a $500 credit limit as soon as your bankruptcy has been discharged.

Waiting Period After Bankruptcy To Qualify For A Conforming Loan

• Fannie Mae And Freddie Mac Bankruptcy Guidelines On Conventional Loans require mandatory waiting period requirements after bankruptcy.
• Conventional Loans are called Conforming loans.
• The reason conventional loans are called conforming loans is that they need to conform to Fannie Mae and/or Freddie Mac Agency Mortgage Guidelines.
• Fannie Mae and Freddie Mac are the two mortgage giants. They are often referred to as Government Sponsored Enterprises (GSE).
• Qualifying for Non-QM Loans One Day out of Bankruptcy with No Waiting

What Is The Role of Fannie Mae and Freddie Mac?

Fannie Mae and Freddie Mac are private companies but are sponsored by the federal government. The Federal Housing Finance Agency is the federal agency in charge of Fannie Mae and Freddie Mac. The main role of Fannie/Freddie is to purchase conventional loans on the secondary market.

Once the lender funds a conventional loan, either Fannie and/or Freddie will purchase the loan on the secondary market. If the conventional loan does not conform, Fannie and/or Freddie will not purchase the loans. If Fannie or Freddie does not purchase the loan, the lender is stuck holding the loan in their portfolio and/or selling it as a scratch-and-dent mortgage on the secondary market

Fannie And Freddie Mac Bankruptcy Guidelines Versus Other Loan Programs

All government and conventional loans have a mandatory waiting period after bankruptcy to qualify for home loans. The waiting period is different depending on the particular loan program. We will compare the government versus conforming bankruptcy waiting period requirements in this paragraph.

Qualifying For Government Loans After Bankruptcy

Here are Bankruptcy Guidelines on government loans:

• HUD, the parent of FHA, require a two-year waiting period after Chapter 7 Bankruptcy
• The Department of Veterans Affairs (The VA) require a two-year waiting period after Chapter 7 Bankruptcy on VA loans
• The USDA requires a three-year waiting period after Chapter 7 Bankruptcy to qualify for USDA loans
• There is no waiting period requirements on VA and/or FHA loans after the Chapter 13 Bankruptcy discharged date

Borrowers can qualify for VA and/or FHA Loans during Chapter 13 Bankruptcy Repayment Plan without the bankruptcy being discharged with Trustee Approval.

Qualifying For Conventional Loans After Bankruptcy

Fannie And Freddie Mac Bankruptcy Guidelines On Waiting Periods To Qualify On Conventional loans:

• There is a four-year waiting period to qualify for Conventional loans after the Chapter 7 Bankruptcy discharged date
• There is a two-year waiting period to qualify for Conventional loans after the Chapter 13 discharge date
• There is a four-year waiting period to qualify for Conventional loans after the Chapter 13 dismissal date

Unlike VA and FHA loans, borrowers cannot qualify for Conventional loans during the Chapter 13 Bankruptcy Repayment Period.

Freddie Mac Bankruptcy Guidelines Versus Non-QM Loans

No Waiting Period To Qualify For A Mortgage After Bankruptcy with Non-QM Mortgages

Homebuyers can now qualify for a mortgage one day out of bankruptcy and/or foreclosure with Non-QM Loans. There are no waiting period requirements after bankruptcy and/or a housing event. A housing event is one of the following:

1. Foreclosure
2. Deed In Lieu Of Foreclosure
3. Short-Sale

Gustan Cho Associates has dozens of non-QM loan programs.

Non-QM Versus Freddie Mac Bankruptcy Guidelines

The following are the eligibility requirements on Non-QM loans:

• Minimum credit scores down to 500 FICO
• 10% to 20% down payment
• The down payment requirements depend on the borrower’s credit scores
• Bank statement mortgage loan program for self-employed borrowers
• Late payments in the past 12 months allowed
• No maximum loan limits
• No private mortgage insurance is required on all Non-QM Loans
• For primary, second homes, and investment properties
• No pre-payment penalty on owner-occupant properties
• Up to 50% debt to income ratios allowed

For more information about the contents of this article and/or other mortgage-related topics, please contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at alex@gustancho.com. The Team at Gustan Cho Associates Mortgage Group is available 7 days a week, evenings, weekends, and holidays. Gustan Cho Associates has a national reputation of being a one-stop mortgage shop.

Not only do we have no lender overlays on government and conventional loans, but we offer dozens of non-QM mortgage loan programs. Some of our most popular loan programs include bank state mortgages, non-QM Jumbo loans, non-QM mortgages one day out of bankruptcy and foreclosure, asset-depletion mortgages, fix and flip loans, and dozens of other alternative mortgage programs.

The following are Freddie Mac’s instructions and guidelines on the eligibility criteria to secure a conventional loan after going bankrupt in January 2025:

Chapter 7: Bankruptcy

Waiting Period: Any borrower filing for Chapter 7 bankruptcy can apply for a conventional loan four years after the court discharges their bankruptcy.

Chapter 13: Bankruptcy

Waiting Period after Discharge: Once the court has discharged a debtor in Chapter 13 bankruptcy, they must wait two years before applying for a conventional loan.

Waiting Period Following Dismissal: A four-year waiting period begins as of the date of a Chapter 13 bankruptcy dismissal.

Extenuating Conditions

In events where borrowers can notate their extenuating circumstances, which are isolated, unforeseen incidents that lead to a sharp decrease in income for a protracted period or an exorbitant increase in liabilities, they could appeal for a lesser waiting period. The waiting period for Chapter 7 bankruptcy can be lessened to two years, while Chapter 13 bankruptcy can be made two years from its dismissal.

Redefining Credit

Borrowers and lenders must display a credit history that has been redefined after bankruptcy credit score cuts. This comprises making all payments on time and retaining a clean credit report.

Mortgage Debt Included in Bankruptcy

The waiting period starts from the date of the bankruptcy discharge, not the foreclosure date, should the mortgage debt be discharged in bankruptcy, and the foreclosure happens afterward, like in instances where a mortgage is discharged in bankruptcy and not re-affirmed.

Lenders can deviate from all the precautions they use and impose other changes; hence, this must be addressed.

So, you should definitely consider contacting a mortgage specialist or reading the latest update from the Freddie Mac Seller/Servicer Guide for further details.

FAQ: Freddie Mac Bankruptcy Guidelines On Conventional Loans

• 1. Is Freddie Mac a Conventional Loan? Freddie Mac provides conventional loans, conforming loans that follow guidelines set by Freddie Mac or Fannie Mae and are not insured or guaranteed by the government.
• 2. What are the Guidelines for Freddie Mac DTI? Freddie Mac has specific guidelines for debt-to-income (DTI) ratios, with a maximum DTI ratio typically set at 45%. However, there may be exceptions and flexibility for borrowers with strong credit profiles or compensating factors.
• 3. Can Borrowers Qualify for Non-QM Loans After Bankruptcy? Yes, borrowers can qualify for non-QM loans one day out of bankruptcy with Gustan Cho Associates. These loans require a 30% down payment and timely payments after bankruptcy to get approval from automated underwriting systems.
• 4. What is the Waiting Period After Bankruptcy for Conventional Loans? The waiting period after bankruptcy to qualify for conventional loans backed by Freddie Mac is typically four years after Chapter 7 bankruptcy discharge or two years after Chapter 13 discharge.
• 5. How do Fannie Mae and Freddie Mac Bankruptcy Guidelines Differ from Government Loans? Government loans like FHA, VA, and USDA have different waiting period requirements after bankruptcy than conventional loans. For example, FHA and VA loans may require a two-year waiting period after Chapter 7 bankruptcy, while USDA loans may require three years.
• 6. What are the Eligibility Requirements for Non-QM Loans? Non-QM loans have flexible eligibility criteria, including minimum credit scores down to 500 FICO, 10% to 20% down payment, and no waiting period requirements after bankruptcy or foreclosure.

This blog about Freddie Mac Bankruptcy Guidelines On Conventional Loans was updated on January 17th, 2025.