Fannie Mae and Freddie Mac are the two mortgage giants in the United States that sets Conventional loan requirements and guidelines. Unlike FHA (Federal Housing Administration) loans that are insured by the United States Department of Housing and Urban Development (HUD) or VA loans that are insured by the United States Department of Veteran Affairs or USDA loans that are insured by the United States Department of Agriculture Rural Development. Conventional loans are NOT insured by any government entity. FHA, VA and USDA loans are insured provided the loan meets at least their minimum guidelines and in the event the borrower defaults on the mortgage the lender is protected or insured. Government loans require little to no down payment and offer low mortgage rates because the risk is limited to the mortgage lender. Private banks and mortgage companies originate and fund FHA loans, VA loans and USDA loans. Upfront and annual mortgage insurance premiums are required on FHA loans and USDA loans. VA loans require an upfront VA funding fee, however there is no annual mortgage insurance premium with VA loans. A borrower cannot get second home financing or investment financing with any government insured loans. For FHA loans, VA loans and USDA loans a borrower cannot get second home financing or investment home financing. Conventional mortgage lenders that meet Fannie Mae and Freddie Mac mortgage lending guidelines offer financing for owner occupied and second homes, vacation homes and investment homes however they do not insure mortgage loans. Conventional loans that meet Fannie Mae and Freddie Mac guidelines are called Conforming Loans because they conform to Fannie Mae or Freddie Mac mortgage lending guidelines. Conventional loans do not have upfront mortgage insurance premiums but Fannie Mae and Freddie Mac require private mortgage insurance for any mortgage loans with a greater 80% loan to value however once a borrower obtains mortgage insurance they are not required to maintain the private mortgage insurance for the life of the Conventional Loan. Private Mortgage insurance can can be canceled once the borrower has reached 20% or more of home equity in their home. In order to cancel Private Mortgage Insurance the borrower will be required to have a Home appraisal to verify the value of the property in order to determine loan to value. Conventional Loan mortgage rates are more impacted by the borrower’s credit scores because they are not guaranteed by the government against default by the mortgage borrower. Conventional Loan mortgage rates are also determined by the the amount of down payment the buyer puts down. The more money invested by the buyer the less risk to the lender and more risk to the buyer. In other words the loan to value. Conventional Loans are more sensitive to credit scores as well, the higher the credit scores and lower the loan to value, the better the mortgage interest rates for a Conventional Loan.
2016 Conventional Loan Requirements: Credit Scores and Debt to Income Ratio Requirements.
Conventional Mortgage Loans have a minimum credit score requirement to qualify. A borrower will need a 620 FICO credit score whereas on FHA Loans the minimum credit score requirement is 580 to qualify for a 3.5% down payment FHA mortgage loan. Fannie Mae and Freddie Mac require a minimum of 5% down payment from the borrower/purchaser to qualify for a Conventional Loan. Fannie Mae and Freddie Mac will allow a 3% down payment for first time home buyers, interpretation here is home buyers who have had not owned a home or had a home loan for the past three years. To qualify for a Conventional Loan there is a maximum debt to income ratio limit of 45% DTI where as FHA Loans limits the back end debt to income ratios to a maximum of 56.9% DTI as long as the borrower has at least a 620 credit score. Any credit scores under 620 the debt to income ratios gets reduced to 43% DTI.
Breaking it down to qualify for a Conventional Mortgage Loan
FHA Loans, VA Loans and USDA Loans are all government guaranteed loans and they do not allow second home financing, this financing is reserved for owner occupied properties only. Conventional loan financing is the source of lending for second home financing or investment home financing. The minimum requirement for Conventional financing on second homes or investment home financing is 10% down but it depends on the type of property the real estate investor is buying.
Government Loans do not allow second home financing nor investment home financing. FHA Loans, VA Loans, and USDA Loans is for owner occupant properties only. Home buyers looking for second home financing or investment home financing need to go with a Conventional Loan. 10% down payment is required for second home financing and with investment homes, it depends on the type of property the real estate investor is buying.
Single family homes that are investment homes require 15% down payment. 2 to 4 unit properties that are investment properties require more down payments as well as reserves.
Borrowers can qualify for a Conventional mortgage loan after a bankruptcy and foreclosure. The guidelines are as follows:
Four Year Waiting Period
Two Year Waiting Period
Seven Year Waiting Period
If a borrower had a mortgage as part of bankruptcy, there is a 4 year waiting period to qualify for a Conventional Loan form the discharged date of your Chapter 7 Bankruptcy date. The foreclosure can be transferred out of your name after the discharged date of your Chapter 7 Bankruptcy discharged date and has nothing to do with waiting period requirements on Conventional loans. The 4 year waiting period begins from the discharged date of the Chapter 7 Bankruptcy
This is a partial overview and I invite you to reach out to The Larry Stepp Team at Gustan Cho Associates if you have further questions or we can assist or guide you through a complicated mortgage application process. I am available 7 days a week, holidays and weekends and look forward to assisting your need.
Larry Stepp 407-922-4755 LarryS.HomesNetwork@gmail.com