Conventional Versus Government Loans For Home Buyers

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

Surge In Conventional Versus Government Loans

• FHA loans are originated and funded by private lenders
• HUD, the parent of FHA, is the government agency that insures FHA loans originated and funded by private lenders
• 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
• FHA loans are for owner-occupant home financing only. Fannie Mae and Freddie Mac set the agency mortgage guidelines on Conventional loans
• Conventional loans are often referred to as conforming loans because they need to conform to Fannie Mae and Freddie Mac Agency Guidelines

Difference Between Conventional Versus Government Loans

• Then why do conventional loans need to conform to Fannie Mae and/or Freddie Mac Agency Guidelines?
• Mortgage bankers and correspondent lenders fund the loans they originate and fund by using their warehouse line of credit
• A warehouse line of credit is like a giant revolving line of credit mortgage bankers use to fund the loans they close
• Once they fund the loans they close, mortgage bankers and/or correspondent lenders need to sell the loans they funded on the secondary mortgage market
• Ultimately, the end buyers of mortgages on the secondary mortgage market are Fannie Mae and/or Freddie Mac
• Smaller correspondent lenders may sell the loans to a larger mortgage banker
• The larger mortgage banker can purchase a bunch of mortgages from groups of correspondent lenders and package them up and sell them to Fannie Mae and Freddie Mac
• However, Fannie Mae and Freddie Mac will not purchase loans that do not conform to Fannie Mae and/or Freddie Mac Agency Guidelines

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

Skyrocketing Home Prices And The Mortgage Markets