This Article Is About Government Versus Conventional Mortgage Guidelines
Government Versus Conventional Mortgage Guidelines: Many homebuyers often get confused when shopping for a mortgage about the difference between government versus conventional loans.
In this article, we will explain the differences in the various home mortgage programs available for homebuyers and which program may benefit borrowers:
- 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
- Government-backed mortgages are for primary owner-occupant homes only
- Second-home and investment properties are not eligible for government-backed mortgages
- Conventional loans do allow for a second home and investment property financing
- Conventional loans are not government-backed mortgages
- Conventional Loans are private home mortgages originated and funded by banks and/or mortgage companies
- If they are not government loans, why do conventional loans need to follow Fannie Mae and/or Freddie Mac Agency Guidelines?
- Mortgage bankers will use their warehouse line of credit to fund the loans they close
- Fannie Mae and Freddie Mac are the two mortgage giants in the nation that purchase loans from lenders on the secondary mortgage market
- The role of Fannie Mae and Freddie Mac is to provide liquidity in the mortgage markets
- Lenders sell mortgage loans after they close and fund the loan on the secondary market
- Lenders will pay their warehouse line of credit with the proceeds from the loans they sell on the secondary mortgage market
- By paying down the warehouse line of credit, lenders can then originate and fund more loans
- Fannie Mae and Freddie Mac will only purchase mortgage loans that conform to their agency mortgage guidelines
- This is why conventional loans are called conforming loans
In this article, we will discuss and cover Government Versus Conventional Mortgage Guidelines.
The Role Of Fannie Mae And Freddie Mac
Fannie Mae and Freddie Mac are the two mortgage giants in the nation and are government-sponsored enterprises (GSE).
- The role of Fannie Mae and Freddie Mac is to provide liquidity in the mortgage markets so lenders can offer home mortgages with a lower down payment at low mortgage rates
- Fannie Mae and Freddie Mac promotes homeownership to hard-working Americans
- Fannie Mae and Freddie Mac are the two largest buyers of mortgages from banks and mortgage companies
- However, in order for Fannie Mae and/or Freddie Mac to buy mortgages by lenders, the mortgages they purchase need to conform to Fannie Mae and/or Freddie Mac Agency Guidelines
- This is why conventional loans are often referred to as conforming loans
- Lenders use their warehouse line of credit to fund mortgages
- Once lenders fund a home mortgage, they now need to sell the mortgage they funded on the secondary mortgage market
- Fannie Mae and Freddie Mac are the two mortgage giants in the nation and biggest buyers of mortgages in the secondary mortgage market
Fannie Mae and Freddie Mac will purchase the mortgages that conform. With the proceeds the lenders get, they pay down their warehouse line of credit. With paying down the warehouse line of credit, mortgage lenders can make more loans and repeat the process. If lenders cannot pay down their warehouse line of credit, they would not be able to originate and fund more loans. By purchasing mortgages, this is how Fannie Mae and Freddie Mac provide liquidity in the mortgage markets.
Types Of Government-Backed Mortgages
There are three types of government loans.
In this blog, we will explain, discuss, and cover the differences between government-backed versus conventional loans. We will also cover the pros and cons of government versus conventional mortgage loans and their agency guidelines.
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 a 10% down payment
- The 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 have 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.
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:
- HUD requires a two year waiting period after the Chapter 7 Bankruptcy discharged date to qualify for FHA loans
- VA requires a two year waiting period after bankruptcy, foreclosure, deed in lieu of foreclosure, short sale
- HUD requires a three year waiting period after foreclosure, deed in lieu of foreclosure, short sale to qualify for FHA loans
- 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.
Government Versus Conventional Mortgage Guidelines: 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.
Government Versus Conventional Mortgage Guidelines: 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 mortgage cannot be reaffirmed after the bankruptcy
- The date of the housing event (foreclosure, deed in lieu of foreclosure, short sale) date can happen after the discharged date of the bankruptcy
- FHA, VA, 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 a two year waiting period after the recorded date of the foreclosure
- However, if the prior mortgage was a prior VA Loan, this may hurt their available entitlement
It is important for borrowers to have rebuilt and reestablished credit after bankruptcy and/or foreclosure to get an approve/eligible per automated underwriting system (AUS). Late payments after bankruptcy and/or foreclosure is frowned upon by lenders and may be difficult to get an AUS Approval.
Government Versus Conventional Mortgage Guidelines: Qualifying For A Mortgage With A Lender With No Overlays
Borrowers who need to qualify for government and/or conventional loans with a national mortgage company licensed in multiple states with no lender overlays, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at email@example.com. We are also experts in non-QM mortgages. Some of our most popular non-QM and alternative finance mortgage programs are 12-month bank statement mortgages, mortgage one day out of bankruptcy, asset-depletion mortgages, fix and flip loans, non-QM jumbo mortgages, and dozens of other non-QM home loan programs. The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.