In this blog, we will cover and discuss what are conventional loans or conforming mortgages and their benefits. Many home buyers often are not familiar with the various different mortgage options they have to choose from. However, which mortgage option is the best for them? One of the most common frequently asked questions we get asked daily at Gustan Cho Associates is what are conventional loans and conforming mortgages. All people know is conventional loans are the most popular loans in the nation. Many borrowers are under the assumption you need perfect credit to qualify for conventional loans.
Learn More About What Are Conventional Loans and Conforming Mortgages
Why Are Conventional Loans Called Conforming Mortgages
Conventional loans are often referred to as conforming loans because conventional loans need to conform to Fannie Mae and/or Freddie Mac guidelines. Fannie Mae and Freddie Mac are the two largest buyers of mortgages in the secondary market. These two GSEs will not purchase mortgages that do not conform to Fannie Mae and/or Freddie Mac Guidelines. This is why conventional loans are called conforming mortgages.
What Are Conventional Loans Versus Conforming Loans
Conforming 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. In this article, we will discuss and cover Conventional Versus Government Loans.
What Are Conventional Loans Versus Conforming Loans?
How Does The Secondary Mortgage Bond Market Work?
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.
Do You Need To Know About What Are Conventional Loans?
Mortgage Lending Guidelines For Conventional Loans
Lending guidelines for conventional loans are the following:
- The 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 the recorded date of the 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
Homebuyers can qualify single-family homes, condominiums, townhomes, 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 need to be warrantable condos. Non-warrantable condos and condotels are not eligible for conforming mortgage financing.
Need To Learn More About What Are Conventional Loans?
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 homebuyers who have not owned a property for the past three years. Homebuyers can qualify for a second home or vacation home conventional loans with a 10% down payment. Investment homes require a 15% to 25% down payment depending on the property type.
What Are Conventional Loans Versus Other Loan Programs?
Using Rental Income As Qualified Income
Borrowers who need to use potential rental income to qualify for an investment property conventional loan here is what is required:
- need to put a 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
- a lease may be required
What Are Conventional Loans and How Gustan Cho Associates Offer Competitive Rates
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 bankruptcy.
When Does The Waiting Period Start After a Mortgage Included in 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 a 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 a 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.
What Are Conventional Loans and its Benefits
Student Loan Guidelines on Conventional Loans
Income-Based Repayment (IBR) is allowed on conventional loans. However, IBR payments need 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 us at Gustan Cho Associates to qualify for conventional loans with no overlays at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. Gustan Cho Associates has a national reputation for its no lender overlays on government and conventional loans.
