Conforming Loans With Bad Credit and Low Credit Scores

This guide covers qualifying and getting approved for conforming loans with bad credit and low credit scores. Can you qualify for conforming loans with bad credit and low credit scores? Conventional loans are often referred to as conforming loans. Government agencies like HUD, VA, or USDA do not back conforming loans. Conventional loans are private home loans originated by banks, credit unions, and mortgage companies.

All lenders need to sell the loans they fund to Fannie Mae or Freddie Mac. The proceeds are used to pay down the warehouse line of credit. The warehouse line of credit is then used again to fund more loans.

Lenders use their warehouse line of credit to originate and fund conventional loans. If conventional loans are private mortgage loans, why do lenders have strict mortgage guidelines on conventional loans?  Lenders need to sell the home loans after they fund using their warehouse of credit on the secondary mortgage bond market. The largest buyers of home mortgages on the secondary mortgage market are Fannie Mae and Freddie Mac.

Are Conventional Loans For Borrowers With Great Credit?

Many first-time homebuyers with bad credit are under the belief they can only qualify for an FHA loan. They are often under the understanding that conventional loans are for borrowers with great credit, higher credit scores, no outstanding collections/charged-off accounts, and need a 20% down payment. This is not the case.

Homebuyers can qualify for Conforming loans with bad credit. First-time homebuyers can qualify for a 3.0% down payment home purchase conventional loan.

A first-time homebuyer has not owned a property in the past three years. Seasoned homeowners can qualify for a conforming loan with a 5% down payment. There are instances where homebuyers need to go with conventional versus FHA loans. Later in this article, we will discuss cases of homebuyers with bad credit that can only qualify for a conventional versus an FHA loan.

Conforming Loans With Bad Credit: Cases Where Borrowers Can Only Go With Conventional Versus FHA Loans

There are instances where borrowers with bad credit need to go with conventional versus FHA loans. FHA and other government loans are for primary owner-occupant financing only. Second homes and investment properties are not eligible for FHA, VA, or USDA financing. Conventional loans allow second home and investment property financing.

Buyers with bad credit who want to purchase a second home or investment property must use conventional loans. Conventional loans allow income-based repayment, while FHA loans do not.

Spouse’s debts are exempt on community property states with conventional loans but not FHA loans. Gustan Cho Associates also offers non-QM loans on primary, second homes, and investment properties. Fannie Mae and Freddie Mac will only buy home mortgages that conform to their minimum agency mortgage guidelines. This is why conventional loans are called conforming loans. The process of funding loans, selling the home loan on the secondary market, paying down the warehouse line of credit, and repeating the origination and funding process continues.

Fannie Mae and Freddie Mac Agency Guidelines on Conventional Loans

Fannie Mae and Freddie Mac set the standards for conventional loans. Conventional loans are called conforming loans because they need to conform to Fannie Mae or Freddie Mac Agency Guidelines. FHA loans generally have laxer lending guidelines versus conforming loans for borrowers with bad credit. Below, we will compare the minimum conforming loan guidelines versus FHA loans:

• The minimum credit score requirements on conforming loans are 620 FICO versus 500 on FHA loans.
• To qualify for a 3.5% down payment FHA loan, the borrower needs a minimum of a 580 credit score.
• Borrowers under a 580 FICO and down to a 500 credit score need a 10% down payment to qualify for an FHA loan.
• The minimum down payment on conforming loans is 3% for first-time homebuyers and 5% for seasoned homebuyers versus 3.5% on FHA loans.
• PMI  is only required for down payments less than 20% on conventional loans, whereas FHA loans require mortgage insurance for the life of the 30-year fixed-rate FHA mortgage
• The maximum debt-to-income ratio on conventional loans is 50%, with no front-end debt-to-income ratio.
• The maximum debt-to-income ratio to get an approve/eligible per AUS on FHA loans is 46.9% front end and 56.9% DTI

VA loans have no maximum debt-to-income ratio caps as long as the borrower can get an approve/eligible per automated underwriting system. The maximum debt-to-income ratio caps on USDA loans is 29% front end and 41% back end to get an approve/eligible per automated underwriting system.

Qualifying For Conforming Loans With Bad Credit After Bankruptcy and Foreclosure

Homebuyers can qualify for government and conforming loans with bad credit after bankruptcy and foreclosure. However, there are mandatory waiting period requirements after bankruptcy or foreclosure to qualify for government or conforming loans. The waiting period requirements are different depending on the home loan program. The waiting period after bankruptcy or foreclosure is longer on conforming loans than they are with government loans. Below are the mandatory waiting period requirements after bankruptcy or foreclosure to qualify for conventional loans:

• A four-year waiting period is required after the Chapter 7 Bankruptcy discharge date.
• There is a four-year waiting period after the Chapter 13 Bankruptcy dismissal date.
• There is a two-year waiting period after the Chapter 13 discharge date
• There is a four-year waiting period after a deed-in-lieu of foreclosure or a short sale to qualify for conforming loans
• There is a seven-year waiting period after a standard foreclosure to qualify for conventional loans

Generally, you cannot have any late payments after bankruptcy or foreclosure. One or two late payments after bankruptcy or foreclosure are not always deal killers. Gustan Cho Associates has helped countless borrowers get approved for conventional loans after bankruptcy or foreclosure.

Borrowers Who Do Not Qualify For Conventional Loans

If homebuyers with bad credit do not qualify for a mortgage, the team at Gustan Cho Associates can help the borrower boost their credit scores with a few quick tricks. Homebuyers can qualify for conforming loans with bad credit as long as they have timely payments for the past 12 months and have at least a 620 credit score. For example, paying down revolving credit accounts can often significantly boost credit scores. Adding secured credit cards or a credit-builder installment loan can often skyrocket credit scores. To qualify for a conforming loan with bad credit and lower credit scores with a lender with no overlays licensed in multiple states, please get in touch with us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.