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Government Versus Conventional Mortgage Guidelines

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Government Versus Conventional Mortgage Guidelines

This BLOG On Government Versus Conventional Mortgage Guidelines Was PUBLISHED On March 31st, 2019

There are several mortgage loan programs for home buyers. Many home buyers, especially first time home buyers, often ask the pros and cons of Government Versus Conventional Mortgage. Government Loans are home loans that are originated by private lenders but backed by the government. There are three types of government loans. 

  • FHA
  • VA
  • USDA

Conventional Loans are often called conforming loans. This is because conventional loans need to conform to Fannie Mae and/or Freddie Mac Mortgage Guidelines. In this blog, we will discuss the pros and cons of government versus conventional mortgage loans.

Advantages Of Government-Backed Loans

Government Loans allow low down payment and low mortgage rates.

  • Lenders can originate and fund FHA, VA, USDA Loans with little to no down payment and offer very low mortgage rates due to the government guarantee
  • VA and USDA Loans do not require any down payment. FHA, one of the most popular loan programs in the United States require 3.5% down payment for borrowers with at least a 580 credit scores
  • Borrowers with under 580 credit scores down to 500 FICO can qualify for FHA Loans with 10% down payment
  • Reason why lenders can offer government loans with little to no down payment with lower credit scores is in the event borrowers default on their government loans, the government agency will insure part of the loss
  • Government loans also has much more lenient when it comes to credit

Borrowers with prior bankruptcy and/or foreclosure can qualify for government loans just 2 to 3 years after their discharge and/or housing event date. 

Government Versus Conventional Mortgage

Waiting Period After Bankruptcy And Housing Event On Government Versus Conventional Mortgage

Waiting period requirements after bankruptcy and housing events are shorter on government versus conventional loans. Here are the waiting period requirements on government loans:

  • FHA requires a two year waiting period after chapter 7 bankruptcy discharged date
  • VA requires a two year waiting period after bankruptcy, foreclosure, deed in lieu of foreclosure, short sale
  • FHA requires a three year waiting period after foreclosure, deed in lieu of foreclosure, short sale
  • USDA requires a three year waiting period after bankruptcy, foreclosure, deed in lieu of foreclosure, short sale
  • Fannie Mae and Freddie Mac require a four-year waiting period after a Chapter 7 bankruptcy discharged date and Chapter 13 dismissal date to qualify for conventional loans
  • There is a four-year waiting period to qualify for conventional loans after deed in lieu of foreclosure and/or short-sale
  • There is a seven-year waiting period after a foreclosure to qualify for conventional loans
  • There is a two-year waiting period to qualify for conventional loans after a Chapter 13 bankruptcy discharged date
  • Borrowers in an active Chapter 13 Bankruptcy repayment plan can qualify for VA and FHA Loans one year into the repayment plan with Trustee Approval
  • There is no waiting period after a Chapter 13 Bankruptcy discharged date for VA and FHA Home Loans

Benefits Of Conventional Loans

There are instances where borrowers need to go with conforming versus government loans.

  • Borrowers with high student loan balances may need to opt with going with conventional loans
  • Conventional Loans are the only loan program that allows Income-Based Repayment (IBR)
  • Many borrowers with student loan balances of over $100,000 or more will have a hard time qualifying for government loans
  • FHA and USDA require 1% of the outstanding student loan balance to be used as a hypothetical debt if the student loan is in deferment
  • VA loans do exempt deferred student loans that have been deferred longer than 12 months
  • Otherwise, VA requires to take 5% of the student loan balance and dividing that figure by 12
  • The resulting figure will be the hypothetical student loan payments used in debt to income ratio calculations

Medical doctors, dentists, nurses, pharmacists, lawyers, business executives, and educators are folks with very high student loan balances.

Mortgage Included In Bankruptcy

Borrowers with a prior mortgage included in their bankruptcy may need to opt to go with conventional loans. Conventional Loans is the only mortgage program that will go off a four year waiting period from the date of the bankruptcy if consumer included a mortgage or mortgages in their bankruptcy. The foreclosure date can happen after the discharged date of the bankruptcy. FHA and USDA will go off the date of the housing event and not the discharged date of the bankruptcy. VA Guidelines on mortgage included in bankruptcy is the same as conventional guidelines. However, if the prior mortgage was a prior VA Loan, this may hurt their available entitlement.

Qualifying For A Mortgage With A Direct Lender With No Overlays

Borrowers who need to qualify for government and/or conventional loans with a direct lender with no overlays, please contact us at Gustan Cho Associates at Loan Cabin Inc. at 262-716-8151 or text us for faster response. Or email us at gcho@loancabin.com. We are available 7 days a week, evenings, weekends, and holidays.

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