How to Qualify for a Conventional, Fannie Mae or Freddie Mac Loan

couple closing a new home loan
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For many would-be homebuyers, conventional mortgage financing that adheres to the underwriting guidelines put forth by mortgage financing giants Fannie Mae and Freddie Mac presents the best value mortgage loan.

While all potential borrowers are unique, you might be part of the group making a decision between the low down-payment offered by FHA or the lower monthly payment that conventional financing options usually present when compared to FHA financing.

Due to the lack of government insurance, conventional loans are a higher risk for lenders.

Thus, if you wish to finance your new home purchase with a conventional loan, you must often meet more stringent credit and income requirements than those who finance their properties using an FHA or VA mortgage.

If you have good credit, a steady income and can afford the down payment, conventional loans often offer lower interest rates than their government-insured counterparts.

They can also be easier and faster to close than their government-backed counterparts.

Whereas FHA loans require a property to meet strict eligibility guidelines as far as price, location and habitability are concerned, conventional lenders are not bound by the same bureaucratic regulations.

Thus, lenders can often process conventional mortgages more quickly than government-insured mortgages. Also, the higher down payment requirement of conventional loans helps you build equity more quickly.

Most conventional mortgages require you to repay the full loan amount at a fixed interest rate over a 30-year period.

You may also opt for an adjustable-rate mortgage in which the interest rate is not fixed, but rather tied to the current market rate. A borrower with an adjustable-rate mortgage can expect his interest rate to fluctuate periodically.

The Conventional Purchase program is a great option when you are looking to purchase a new home as a primary residence, second home or investment property. Be careful though, all three occupancy types come with a slightly different set of rules and guidelines on how they should be documented.

Like with most mortgage underwriting guidelines, as you progress on the risk spectrum from primary residence to investment property, the guidelines stack up on top of each other.

The base underwriting guidelines for Fannie Mae and Freddie Mac are established. In general, the basic guidelines that are required for all borrowers to meet certain credit scores, income, work history, debt to income and minimum down payments.

Below are just a few of the items a lender will look at when considering financing.

  • Your total monthly expenses
  • Your total gross income per month
  • Your employment history
  • Your credit score and payment history
  • Your assets (checking, savings, and retirement accounts)

A common misconception about conventional refinancing is that you need 20% equity in order to qualify. The reality is conventional financing allows you to refinance with as little as 5% equity in combination with financed, monthly, or lender paid mortgage insurance.

Why Are Conventional Mortgage Loans So Great?

The Conventional Purchase program has very competitive pricing compared to some other programs available. This can make a big difference in your monthly mortgage payment and even the interest you will pay over the life of the loan.

Your mortgage professional should clearly and concisely illustrate the pros and cons between conventional mortgage loans and those offered by the Federal Housing Administration (FHA), Veterans Administration (VA) and U.S. Department of Agriculture (USDA).

That being said, let’s discuss conventional loans which tend to offer a lot more variety.

With a conventional loan, which includes both conforming and non-conforming loans, you can get your hands on pretty much anything from a 1-month ARM to a 30-year fixed, and everything in between.

So if you want a 10-year fixed mortgage, or a 7-year ARM, 20-year fixed or whatever, a conventional loan will likely provide that mortgage option and be the way you want to go.

Another plus to conventional mortgages is that they’re available at pretty much every bank and lender in the nation. That means you can use any bank you wish and/or shop your rate quite a bit more. Not all lenders offer FHA products, so you might be limited in that respect.

Additionally, conventional loans can be used to finance just about any property, whereas some condo complexes (and some houses) aren’t approved for FHA financing.

Even though this program is more difficult to qualify for, you need to consider it, especially if you have equity in your home, above average credit or would like to avoid mortgage insurance.

What Are the Typical Qualification Requirements?

Please note that your personal situation is likely unique and the list below is by no means meant to supersede the documents requested by a mortgage professional who has personally reviewed your individual situation

  • Minimum credit score 640 (620 may be allowed in some circumstances)
  • Total debt to income ratio under 45%
  • Housing debt to income ratio under 35%
  • No recent major derogatory credit - bankruptcy, foreclosure or a short sale
  • Need to verify your down payment and get funds from an allowed, documented asset source
  • Verifiable income, typically 2 years worth, with exceptions for recent graduates and other major life events