Conventional Loans are called conforming loans because they need to conform to Fannie Mae and/or Freddie Mac mortgage lending guidelines. Fannie Mae and Freddie Mac have their mortgage lending guidelines on conventional loans and conventional mortgage loan borrowers need to meet those conventional mortgage lending guidelines in order to qualify for conventional loans. Conventional Loans have tougher mortgage lending guidelines than government loans such as FHA Loans, VA Loans, USDA Loans because conventional loans are not insured by a government sponsored enterprises such as the Federal Housing Administration, Department of Veteran Affairs, and USDA. Conventional Loans are extremely credit score sensitive where the lower the borrower’s credit scores are, the higher the mortgage rates are. Lower credit scores are viewed as riskier borrowers so in order for a conventional mortgage loan borrower to get the best conventional mortgage rates, they need higher credit scores and lower loan to values. However, you can qualify for conventional loan with bad credit. If you are a home buyer seeking the best conventional mortgage rates, you will need credit scores of at least 740 FICO and at least 20% equity in your home to get the par rates on conventional loans. Any credit scores lower then 740 FICO will get pricing adjustments. Minimum credit scores to qualify for conventional loans is 620 FICO. A 620 FICO credit score is considered a very low credit score for conventional loans.
Cases Where Conventional Loans Are The Only Option
As mentioned earlier, you can qualify for conventional loan with bad credit, however, the chances are that you will be paying a very high interest rate. For example, if a prime borrower, prime borrowers are borrowers with at least a 740 FICO credit score and 20% down payment, get quoted a conventional mortgage rate of 4.0%, a borrower seeking a conventional loan with bad credit, example would be 620 FICO credit score, the borrower seeking conventional loan with bad credit may be quote a conventional mortgage rate of 5.0%. These conventional mortgage rates are not real quotes and are just for illustration purposes. FHA Loans are not credit sensitive like conventional loan because government loans are insured by the government against borrower’s default on the loan whereas conventional loans are not. Cases where mortgage loan borrowers need to go with conventional loans instead of other types of loans such as FHA Loans, VA Loans, USDA Loans are home buyers who are purchasing second homes, vacation homes, or investment homes. FHA Loans, VA Loans, and USDA Loans are only for primary residences and the home buyer needs to only purchase owner occupant homes. Other cases where home buyers need to go with conventional loans instead of FHA Loans are when they want to purchase a condominium and the condominium complex is not FHA approved so they need to go with conventional loans.
Requirements On Conventional Loan With Bad Credit
To qualify for conventional loan with bad credit, the mortgage loan borrower needs to have at least a 620 FICO credit score, have been timely on their monthly credit obligations for the past 12 months, 3% down payment for first time home buyers and 5% down payment for seasoned home buyers, debt to income ratios of no greater than 45%, at least 4 years out of bankruptcy, at least 4 years out of deed in lieu of foreclosure, at least 4 years out of short sale, at least 7 years out of foreclosure, and no judgments and/or tax liens and if the borrower has judgments and/or tax liens, they must have a written payment agreement with the judgment creditor and/or Internal Revenue Service and have at least three months payment history with them.