Mortgage Lending Guidelines On Government Versus Conventional Loans
This BLOG On Mortgage Lending Guidelines On Government Versus Conventional Loans Was UPDATED On March 7th, 2019
Mortgage Lending Guidelines: Government Loans are home loan programs that insure lenders in the event of borrower defaults. There are three different types of government loan programs:
- FHA Loans
- VA Loans
- USDA Loans
Conventional Loans also referred to as Conforming Loans are not guaranteed and/or insured by the federal government. Conventional Loans need to conform to Fannie Mae and/or Freddie Mac Mortgage Lending Guidelines. The reason it needs to conform to Fannie/Freddie is because lenders sell conforming loans once its funds on the secondary market to Fannie Mae or Freddie Mac. If the loan does not conform to Fannie/Freddie Guidelines, Fannie/Freddie will not purchase them.
Agency Guidelines Versus Lender Overlays
There are two separate types of mortgage lending guidelines.
First, there are federal mortgage lending guidelines set by:
The second type of mortgage guidelines is called lender overlays.
What Are Lender Overlays
Overlays are additional guidelines that are above and beyond the minimum federal mortgage lending guidelines set by the various mortgage loan programs such as the following:
- FANNIE MAE
- FREDDIE MAC
The above agencies have their own minimum mortgage lending guidelines. However, each lender can set their own overlays on top of the minimum guidelines.
FHA Mortgage Guidelines On Credit Scores
Basic mortgage lending guidelines for FHA loans are the following:
- Minimum 580 credit scores to qualify for 3.5% down payment home purchase FHA loan
- The Automated Underwriting System Findings (AUS) will state the conditions borrowers need to abide by
- However, borrowers 580 to 620 score, rental verification may be required if AUS conditions for it
- Maximum of 43% debt to income ratios are allowed to get an approve/eligible per Automated Underwriting System (AUS)
- Borrowers with credit scores over 620 can have a maximum debt to income ratios capped at 46.9% front end, 56.9% back end for approve/eligible per AUS
- Credit scores between 500 and 579 require 10% down payment on FHA Loans to get approve/eligible per AUS
FHA Mortgage Lending Guidelines After Bankruptcy And Housing Event
FHA has mandatory waiting requirements after bankruptcy and/or housing event:
- 2 year waiting period after Chapter 7 Bankruptcy discharged date to qualify for FHA Home Loans
- 3 year waiting period after a foreclosure, deed in lieu of foreclosure, or short sale
- Borrowers in a Chapter 13 Bankruptcy Repayment Plan can qualify for FHA Loans one year into a Chapter 13 Repayment
- Trustee approval required
- There is no waiting period after Chapter 13 Bankruptcy discharged date
- Any Chapter 13 Bankruptcy without a two-year seasoning after the discharged date needs to be manually underwritten
Mortgage Lending Guidelines On Collections And Charged Off Accounts
Borrowers do not have to pay outstanding collections and charged off accounts to qualify for both VA and FHA Loans. FHA is a lot more lenient in granting an approve/eligible per Automated Underwriting System than the VA is.
- Outstanding collections allowed
- However, 5% of the unpaid non-collection account balance will be used towards debt to income calculations
- This is for non-medical collection accounts
- Medical Collection accounts are exempt from this rule
On owner occupant properties, VA, FHA, Fannie Mae, Freddie Mac does not require borrowers to pay outstanding collections and/or charged off accounts.
Mortgage Lending Guidelines On Credit Disputes
Borrowers cannot have an active credit dispute during mortgage process unless the derogatory tradeline is over 24 months old.
- Medical credit disputes are exempt
- Any credit disputes on non-medical collections with a total aggregate outstanding balance of greater than $1,000 is not allowed and will suspend the mortgage process
- Borrowers need to retract the credit disputes
- Any credit disputes on charged-off accounts, late payments, and other derogatory accounts are not allowed during the mortgage process
Medical collection accounts and non-medical collection accounts with zero balances are exempt.
Non-occupant co-borrowers are allowed on FHA Loans from relatives and/or family members.
- More than one Non-occupant co-borrowers are permitted on FHA Loans
- VA Loans does not allow for non-occupant co-borrowers
- Non-Occupant Co-Borrowers needs to be related to the borrower by law, marriage, or blood
- Only the veteran borrowers’ spouse is allowed to be co-borrowers on a VA Home Loan
VA Mortgage Guidelines
VA mirrors FHA Guidelines. Waiting period after Chapter 7 Bankruptcy, Foreclosure, Deed In Lieu Of Foreclosure,
- Short Sale is two years. Veteran Borrowers can qualify for VA Home Loans one year into a Chapter 13 Bankruptcy Repayment Plan
- There is no waiting period to qualify for VA Loans after Chapter 13 Bankruptcy discharged date
- Any Chapter 13 Bankruptcy with less than two years seasoning needs to be a manual underwrite
Fannie Mae Mortgage Lending Guidelines
Minimum credit scores for conventional loan programs are 620:
- Borrowers can qualify conventional loan with 5% down payment four years after a deed in lieu of foreclosure and short sale
- Waiting Period is seven years after foreclosure in qualifying for conventional loans
- There is a mandatory 4-year waiting period after Chapter 7 bankruptcy discharged date to qualify for a conventional mortgage
- Two-year waiting period after Chapter 13 Bankruptcy discharged date
- Four year waiting period after Chapter 13 Dismissal Date
- Non-occupant co-borrowers are not allowed with Fannie Mae but is allowed with Freddie Mac
Mortgage Part Of Chapter 7 Bankruptcy
Borrowers can qualify for conventional loans after four years from the discharged date of Chapter 7 Bankruptcy if they have mortgage part of Chapter 7.
- The foreclosure, deed in lieu, or short sale can be finalized after the Chapter 7 Bankruptcy and that date has no impact on the waiting period
- Fannie Mae and Freddie Mac both allow a four year waiting period from the discharged date of Chapter 7
- Housing Event needs to have been finalized
- The mortgage cannot be re-affirmed
- No Late Payments after Chapter 7 Bankruptcy