Conventional Loan Guidelines for Homebuyers

Conventional Loan Guidelines for Homebuyers

As a new loan officer,  there are two main programs you are going to have to deal with. Conventional and FHA loans are the two most popular loan programs for homebuyers. FHA loans are overseen and regulated by the United States Department of Urban Development or HUD.  Conventional loans are referred to as conforming loans. Conforming loans need to conform to Fannie Mae and/or Freddie Mac agency mortgage guidelines.  In this blog, we will be discussing and covering Conventional loan guidelines for homebuyers.

The Role of Fannie Mae and Freddie Mac on Conventional Loans
Fannie Mae and Freddie Mac on Conventional Loans

Fannie Mae and Freddie Mac are the two Government Sponsored Enterprises or GSE’s. The two mortgage giants set mortgage lending guidelines for Conventional loans.  GSE is by definition a financial services corporation that is private but sponsored by a government entity. The government-sponsored enterprises of Fannie Mae and Freddie Mac are to provide market liquidity in the housing and mortgage markets.

How Does Fannie Mae and Freddie Mac Provide Market Liquidity in the Housing Markets

The objective and mission of Fannie Mae and Freddie Mac are to enhance the flow of credit to targeted sectors of the economy by buying most of the mortgages funded by lenders on the secondary market. Doing so enables mortgage companies to relieve their warehouse line of credit so they can do more loans. Fannie and Freddie provide market liquidity in the housing and mortgage markets by reducing the cost of credit by reducing the risk.

The Importance of Fannie Mae and Freddie Mac for the Mortgage Industry

Mortgage Lenders need to ensure they are following the Fannie Mae and Freddie Mac guidelines if they intend on funding Conventional loans to borrowers. This holds especially true if they plan on selling these loans to Fannie Mae and Freddie Mac.

Fannie Mae and Freddie Mac are the Largest Buyers of Mortgages on the Secondary Mortgage Market

You see after a loan is funded by a lender it takes away from their cash, but they will almost immediately turn around and resell the loan to Fannie and Freddie in order to replenish their cash, so if the loan doesn’t meet Conventional loan guidelines, there is no way it will be resold either.  Conventional Loans are also known as Conforming Loans for the reasons that they must conform with Fannie Mae and Freddie Mac lending guidelines.

Private Mortgage Insurance On Conventional Loans

2016 Conventional Loan Basics: PMI
In terms of Conventional loan guidelines,  any borrower who doesn’t put down at least 20% down payment on a Conventional loan home purchase is required to have private mortgage insurance.  Private Mortgage Insurance known as PMI for short is in place so that in the event a borrower defaults on their conventional loan the private mortgage insurance company will cover part of the loss of the foreclosure to the lender.  PMI is similar to the government guaranteeing loans in the event of FHA, VA, and USDA loans.  Private Mortgage Insurance can be canceled once the borrower reaches 80% loan to value either by paying down the mortgage balance or by the home increases in value and confirmed by a current appraisal.

Conventional Loan Guidelines and Requirements

Below you will find a list of requirements per Conventional loan guidelines.  These requirements are set by Fannie Mae and Freddie Mac and need to be followed for Conventional loan guidelines:

  1. The minimum FICO credit score to qualify for conventional loans is 620 FICO
  2. Down Payment: 5% on a home purchase or 3% is available for first-time homebuyers
  3. Debt To Income Ratio: 45% (Total monthly debt obligations with the new home payment divided by monthly gross income)
  4. Non-Occupant Co-Borrowers: Fannie Mae and Freddie Mac allow non-occupant co-borrowers

Fannie Mae and Freddie Mac do not require non-occupant co-borrowers to be related to the main borrower by law, marriage, or blood. HUD requires non-occupant co-borrowers to be related to the main borrower by blood, law, marriage if they want to qualify for a 3.5% down payment FHA loan. HUD does allow non-occupant co-borrowers who are not related to the main borrower to become co-borrowers but will need a 25% down payment versus a 3.5% down payment.

Conventional Loan Guidelines: Can I Qualify For Conventional Loans with Bad Credit?

Mandatory Waiting Periods After Bankruptcy and Foreclosure:

  1. Chapter 7 Bankruptcy: 4 Years after discharge date
  2. Chapter 13 Bankruptcy: 2 years after discharge date
  3. Short Sale or Deed In Lieu of Foreclosure: 4 years
  4. Foreclosure: 7 years from the recorded date  of the foreclosure or the sheriff’s sale date taking the property out of your name
  5. Outstanding collections and charged-off accounts do not have to be paid to qualify for owner-occupant conventional loans

Re-established credit after bankruptcy and/or foreclosure with no late payments.

Conventional Loan Guidelines Versus Lender Overlays on Conventional Loans

2016 Conventional Loan Basics: Conclusion
As you can see if you don’t know the Conventional loan guidelines,  you will have problems getting qualified for a conventional loan.  As long as you abide by the Fannie Mae and Freddie Mac Guidelines, there is nothing to worry about. Loan Consultants has no lender overlays on conventional loans.  If you aren’t 100% sure if the Conventional loan is the best loan program for you and feel you meet the minimum conventional loan guidelines, please contact us at Loan Consultants at 844-275-2007.  Text us for a faster response. The team at Loan Consultants is available 7 days a week, evenings, weekends, and holidays. Loan Consultants has no lender overlays on government and conventional loans. We are also experts in originating non-QM and alternative mortgage loan programs.

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