What Are Conventional Loans Versus Government Insured Loans

What Are Conventional Loans Versus Government Insured Loans

This BLOG On What Are Conventional Loans Versus Government Insured Loans Was Written By Mike Gracz Of Gustan Cho Associates Mortgage Group

What Are Conventional Loans?

Conventional Loans are also called conforming loans because they must conform to Fannie Mae and/or Freddie Mac mortgage lending guidelines.

  • Fannie Mae and Freddie Mac are the two mortgage giants in the United States and are in charge of setting conforming mortgage lending standards
  • For banks and mortgage bankers to be able to sell the conventional loans they originate on the secondary market, the loans they originate, process, underwrite, and fund need to conform to Fannie Mae and/or Freddie Mac Standards
  • This is how the secondary market works:
    • banks and lenders use their warehouse lines of credit
    • they fund loans they originate and need to sell these loans on the secondary market
    • They need to sell these loans in order for them to relieve the warehouse lines of credit
    • This is so they can originate more loans
  • In order for the  Fannie Mae and Freddie Mac to be able to purchase the loans banks and mortgage bankers originate and fund, every single of these loans needs to meet Fannie Mae and/or Freddie Mac guidelines.

What Are Conventional Loans: Mortgage Lending Guidelines For Conventional Loans

Lending guidelines for conventional loans are the following:

  • Borrower needs a minimum of 620 credit scores
  • Maximum debt to income ratio cannot exceed 50% debt to income ratio
  • Minimum 4 year waiting period after Chapter 7 bankruptcy, short sale, and deed in lieu of foreclosure
  • Minimum 7 year waiting period after recorded date of foreclosure
  • Two year waiting period after Chapter 13 Bankruptcy discharged date
  • Four year waiting period after Chapter 13 dismissal date

Types Of Properties That Qualify For Conventional Loans

Home buyers can qualify single family homes, condominiums, town homes, two to four unit multi family homes with conventional loans.

  • Owner occupied homes, second homes, and investments homes can get financing with conventional loans
  • All condos needs to be warrantable condos
  • Non-warrantable condos and condotels are not eligible for conforming mortgage financing

Down Payment Requirements On Conventional Loans

First time home buyers can qualify for a 3% to 5% down payment home purchase conventional loans with Fannie Mae.

  • Freddie Mac allows a 3% down payment home purchase conventional loans for home buyers who have not owned a property for the past three years
  • Home buyers can qualify for second home or vacation home conventional loans with a 10% down payment
  • Investment homes require 15% to 25% down payment depending on the property type
  • Borrowers who need to use potential rental income to qualify for an investment property conventional loan here is what is required:
    • need to put 25% down payment
    • have a 75% Loan To Value
    • can use 75% of the potential rental income to qualify for an investment property conventional loan
    • property may need to be appraised
    • lease may be required

Waiting Period After Bankruptcy And Foreclosure For Conventional Loans

We covered the basics of the waiting period after bankruptcy and foreclosure to qualify for conventional loans.

  • However, there are certain rules and regulations with regards to qualifying for conventional loans after bankruptcy and foreclosure
  • Borrowers with a prior mortgage part of bankruptcy, the waiting period is four years from the discharged date of discharged date of bankruptcy
  • The housing event or foreclosure can be recorded after the discharge date of Chapter 7 Bankruptcy
  • This new Fannie Mae mortgage guidelines became effective last August 2014
  • Also, the conventional loan program where borrowers can qualify for a conventional loan  of 2 years after deed in lieu of foreclosure and/or short sale with 20% down payment is no longer in effect as of August of 2014
  • New Fannie Mae guidelines to qualify after deed in lieu of foreclosure and/or short sale is now four years from the recorded deed in lieu of foreclosure and/or date of the short sale reflected on the HUD Settlement Statement
  • 3% to 5% down payment is required on purchases with conforming loans

Student Loan Guidelines

Income Based Repayment (IBR) is allowed on conventional loans. However, IBR payments needs to report to all three credit bureaus. If IBR payments are not reporting on credit bureaus, loan officers can do a rapid rescore/credit supplement. This normally takes 3 to 5 business days. Borrowers with higher student loans can contact Michael Gracz of Gustan Cho Associates to qualify for conventional loans with no overlays. Michael Gracz has a national reputation for its no lender overlays on government and conventional loans.

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