Conventional Loan Credit Requirements

Do you qualify for a conventional loan?

Nice home financed with a conventional loanConventional loans are those that are not backed by the government, such as FHA and VA loans. They are typically given to borrowers with good credit who can provide a down payment of at least 20%. The credit requirements for a conventional loan vary depending on the lender, but most require a score of at least 620.

There are several reasons why you might opt for a conventional loan over an FHA or VA loan. One reason is that you may have better luck qualifying for a lower interest rate with a conventional loan. Another reason is that you might not have to pay mortgage insurance with a conventional loan if you put down at least 20% (whereas you would with an FHA loan).

If you’re thinking of applying for a conventional loan, be sure to shop around and compare offers from multiple lenders.

Conventional loans are made by private lenders, such as commercial banks, savings and loan associations, credit unions, and mortgage bankers. The conventional mortgage is also referred to as conforming loans.

Conventional mortgages adhere to Fannie Mae and Freddie Mac lending requirements. Fannie Mae and Freddie Mac provide funding for conventional loans. These two quasi-agencies provide the mortgage money to the lenders.

The credit requirements for a conventional loan are stricter than FHA, USDA and VA loans. In order to qualify for a conventional loan, you need a credit score of at least 620. You also need to have a down payment of at least 5%; although Fannie Mae offers two specialty loans, Conventional 97 and HomeReady. The specialty loans only require a 3% down payment.

The vast majority of mortgages in the United States are conventional loans. And if you're purchasing a house, this is almost certainly the loan you'll utilize. As a result, here is everything you need to know about them.

Credit Reports for a Conventional Loan

When applying for a home loan, your credit score is critical. This three-digit number describes your credit management and bill payment performance. Credit scores of 740 or above are considered great by lenders.

Numerous monthly payments including those for your mortgage, auto loan, school loan, credit cards, and any personal loans are reported to the three major credit bureaus Experian®, EquifaxTM, and TransUnion®. Pay your bills on time each month, and your credit score will gradually improve. However, if you pay them 30 days or more beyond their due dates, your credit score may suffer a 100-point drop.

Do not worry if your credit score is less than 740. While lenders' requirements vary, many will accept you for a conventional loan with a credit score of at least 620. Simply, anticipate a higher interest rate if your credit score is less than 740.

A residential mortgage credit report contains information on the borrower's past credit behavior, current employment status, and residence history.
The following information must be provided for each debt shown on the credit report:

  • the name of the creditor,

  • when the account was established,

  • the amount of the highest credit,

  • the account's current status,

  • the payment amount required,

  • the outstanding amount, and

  • a record of past payments
    Information from Public Records

Credit reports include all publicly accessible information on a person's credit history, as well as information about the sources of that information. They also include information about whether any judgments, foreclosures, tax liens, or bankruptcies have been found.

Liens and Judgments against you

At or before closing, all liens and outstanding judgments in the Public Records section of the credit report must be paid off. The credit report file may also include documentation of the satisfaction of these obligations, as well as proof of sufficient money to meet these obligations.

Past-Due, Collection, and Charge-Off Accounts

Prior to settlement, judgments, taxes, non-mortgage charge-offs, tax liens, mechanic's liens, and other liens that may affect Fannie Mae or Freddie Mac's lien position or reduce the borrower's equity are required to be paid off.

Credit accounts that have not been reported as collection accounts must be made current.

Borrowers are not obliged to repay outstanding collections or non-mortgage charge-offs on one-unit, primary home properties, regardless of the amount.

Prior to, or at the time of closing, all collections and non-mortgage charge-offs on two-to-four-unit second homes and owner-occupied properties totaling more than $5,000 must be paid in full.

For investment properties, non-mortgage charge-off and individual collection accounts with a combined balance of $250 or more, as well as accounts with a combined balance of more than $1,000, must be paid in full prior to or at the time of closing.

Bankruptcy (Chapter 11 or Chapter 7)

Bankruptcy graphicA four-year waiting period is needed, beginning on the date of the bankruptcy action's discharge or dismissal.

Extenuating Circumstances are allowed as an exception.

If mitigating circumstances can be shown, a two-year waiting period is permissible. The waiting term is calculated from the date on which the bankruptcy action was discharged or dismissed.

Bankruptcy (Chapter 13)

There is a difference in the bankruptcy court system between discharged Chapter 13 bankruptcy cases and dismissed Chapter 13 bankruptcy cases.

Chapter 13 bankruptcy proceedings are subject to a waiting time, which is set as follows:

Two years from the date of discharge or four years after the date of discharge is to be followed. Borrowers have already completed a part of the waiting period by the time the Chapter 13 plan is finalized, and the borrower is discharged, assuming that the discharge date is used to begin counting the waiting period.

Borrowers who are removed from their Chapter 13 agreement must wait four years before reapplying for bankruptcy relief.

As an exception, the use of mitigating circumstances is permitted. A two-year waiting period after the dismissal of a Chapter 13 case is authorized if mitigating circumstances can be shown.

There are no exceptions to the two-year waiting period that must be followed after a Chapter 13 bankruptcy discharge.

Multiple Bankruptcy Filings

For debtors who have filed for bankruptcy more than once over the preceding seven years, calculated from the date of the most recent discharge or dismissal, an extra five-year waiting period is required.

Situations that qualify as extenuating circumstances are excluded from the rule.

If exceptional circumstances can be shown, it is possible to get a three-year waiting period.

The three-year period begins on the date of the most recent dismissal or discharge from bankruptcy and ends three years later.

Exceptional circumstances must have occurred in order for the most recent bankruptcy filing to be valid, according to federal law.

Foreclosure

According to the borrower's credit report or any submitted foreclosure documents, the seven-year waiting period begins on the day the foreclosure action was completed, as shown on the credit report or any related foreclosure paperwork.

Extenuating Circumstances are allowed as an exception.

If mitigating circumstances are shown, a three-year waiting period is permitted, beginning on the day the foreclosure action was completed. Between the ages of three and seven years, additional conditions apply, including the following:

In the event of a transaction that has a maximum, CLTV, HCLTV, or LTV ratio of 90% or the transaction's maximum, CLTV, or HCLTV, or LTV ratios as established by the Eligibility Matrix.

It is acceptable to purchase a main residence for oneself.

Refinances with limited cash-out are permitted for all occupancy types, subject to the qualifying conditions in effect at the time of the refinance.

Bankruptcy and Foreclosure on the Same Mortgage

Lenders may be able to take advantage of certain bankruptcy waiting periods, if they can show that a mortgage debt was paid off during bankruptcy. The lender needs to show that the debt was paid off during bankruptcy.

In all other instances, the applicable foreclosure or bankruptcy waiting time is the longer of the two periods specified above.

Deed-in-Lieu of Foreclosure, Pre-Foreclosure Sale, and Charge-Off of a Mortgage Account

The following types of transactions are used as a substitute for a foreclosure procedure.

Deed-in-lieu of foreclosure means the title to the real estate is returned to the servicer rather than being foreclosed upon.

Remarks Codes such as “Forfeit deed in lieu of foreclosure” are often seen on credit reports.

Also included on credit reports are notations such as, “settled for less than full balance,” and “settled for less than full amount.”

The phrase “short sale” or “pre-foreclosure sale” refers to the sale of a property in lieu of foreclosure, with a payoff that is less than the total amount outstanding and has been accepted by the servicer.

When a mortgage account is charged off, it indicates that the creditor has determined that the mortgage obligation has little (or no) possibility of being recovered.

Charge-offs are often documented when an account reaches a specific delinquent level and are indicated on credit reports by the payment (MOP) code “9.”

A four-year waiting period is required starting from the date of the deed-in-lieu-of-foreclosure, charge-off, or pre-foreclosure sale, as shown on the borrower's credit report or other documentation.

Exemptions for Extenuating Circumstances

Exceptions to the two-year waiting period may be granted in the event that extraordinary circumstances can be shown.

Conclusion

Meeting conventional loan credit requirements can seem like a daunting task, but with a little preparation, it is definitely achievable. By following the tips outlined in this article, you will be well on your way to securing the financing you need for your next home.

SOURCE:
General Requirements for Credit Scores
Requirements for Credit Reports

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