Who are Conventional Loans Best For?
This Article Is About Conventional Versus Government Loans For Home Buyers
Even with the coronavirus outbreak in February 2020, the housing market roared with no signs of a housing market correction. Many experts predicted another housing market meltdown and correction. Boy, were they wrong. The Federal Housing Finance Agency and HUD both increased conforming and FHA loan limits for 2021 due to homebuyers being priced out of the market. The COVID-19 outbreak changed the way we work. Many companies have turned to remote positions for their employees.
Now with remote workers, they are not stuck in a particular geographic area. Remote wage earners can live anywhere they want. Many are fleeing high taxed states to lower-taxed states with affordable housing and cost of living. Mismanaged high-taxed states with incompetent governors like Illinois and New York are losing taxpayers like never before. Due to the ability to live anywhere for remote workers, many city dwellers renting an apartment are fleeing to the suburbs. and/or rural areas with affordable housing and becoming first-time homebuyers sooner than later.
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Surge In Conventional Versus Government Loans
However, in order for HUD to partially insure lenders against default and losses by borrowers on FHA loans, lenders need to follow the minimum agency guidelines of HUD. Due to the government guarantee, lenders can offer a 3.5% down payment home purchase FHA loan with credit scores as low as 580 FICO at competitive mortgage rates.
Difference Between Conventional Versus Government Loans
The Role Of Fannie Mae And Freddie Mac
The role of Fannie Mae and Freddie Mac is to provide liquidity in the mortgage markets by purchasing mortgages in the secondary mortgage markets. Due to Fannie Mae and Freddie Mac, lenders can sell the mortgages they fund and pay their warehouse lines of credit. By being able to pay their lines of credit, lenders can repeat making mortgage loans to consumers at competitive rates.
Conventional loans are becoming increasingly popular. More and more borrowers are opting to choose conventional versus FHA loans. There are mortgage guidelines that borrowers meet on conventional loans but not FHA loans.
- For example, FHA loans do not accept Income-Based Repayment (IBR Payments on student loans.
- However, Fannie Mae and Freddie Mac Agency Guidelines allow IBR Payments on student loans.
This also holds true on zero payment IBR payments.
Down Payment Requirements On Conventional Versus Government Loans
A first-time homebuyer is a buyer who has not had an interest in homeownership in the past five years. Borrowers who had a prior mortgage included in bankruptcy can qualify for a conventional loan four years from the discharged date of bankruptcy. The finalization of the date of the housing event (foreclosure, deed in lieu of foreclosure, short-sale) does not matter. The mortgage cannot be reaffirmed. However, HUD will require a three-year waiting period from the finalization date of the housing event if there was a mortgage included in bankruptcy and the discharged date does not matter.
Fannie Mae and Freddie Mac have lightened their agency guidelines when it comes to prior bad credit. You do not have to pay outstanding collections and/or charged-off accounts on primary home conventional loans just like FHA loans. Mortgage guidelines on outstanding collections and charged-off accounts are different on investment properties.
January 30, 2021 - 4 min read