Freddie Mac and Fannie Mae Underwriting Guidelines for Mortgage Approval
These are called conventional because they must conform to the Freddie Mac and Fannie Mae standards set by the government, but they are not government insured. This poses a greater risk to lenders because they are not guaranteed repayment in the event the loan defaults; rather, they are forced to take a personal loss.
For these reasons, conventional mortgages are more difficult to obtain with stricter lending requirements in regards to credit score, down payment, debt to income ratio, mortgage insurance and previous bankruptcies or foreclosure.
Let's take a look at each subject below:👇
Credit Scores:
Fannie Mae and Freddie Mac Require a minimum 620 credit score.
You have three credit scores from Experian, Equifax, and Transunion, and they take the middle score, throwing out the high and low score. The higher the credit score the better pricing you will get on the rate and mortgage insurance along with your down payment.
Ideally for higher credit score buyers, say over 680, and with at least 3% down payment with a low debt to income ratio.
Down Payment:
Conventional mortgage loans require a minimum of 3% down payment. The more you put down, the better the rate, lower the mortgage insurance, and greater chances of getting approved.If you put down 20%, then you will not have to pay mortgage insurance, or if you refinance an existing loan that has mortgage insurance, you can potentially get rid of the mortgage insurance if your equity position is less than 20% of the home's value.
Debt to Income:
Conventional Mortgage loans typically will not allow for a back-end ratio of over 45%. They're two ratios, the front-end and back-end ratio. The front-end ratio is a percentage of the total house payment of your total gross monthly income. The back-end ratio is the new total house payment along with the monthly payments on your credit report divided by your total gross monthly income.
For example, if you make $3,000 gross a month, your total backend ratio would me maxed out at 1,350 a month. So if you had $300 in monthly payments on the credit report, this would allow for a maximum house payment of $1,050.00
Mortgage Insurance:
Mortgage insurance is typically cheaper and less expensive on conventional mortgage loans. They're competing private mortgage insurance companies competing for the business with the names of MGIC, Radian, Essent, Genworth and Ugcorp.
Conversely, it is not like Government insured FHA, VA and USDA mortgage loans where all applicants get the same premiums regardless of credit score, down payment and debt to income ratio. Mortgage insurance is usually expressed as a monthly premium, with no upfront mortgage premiums like FHA, VA, and USDA government loan programs.
The higher the credit score, lower debt to income ratio and more nd can be removed once you reach 80% equity position in the home.
Bankruptcies and Foreclosure:
Bankruptcy (Chapter 7 or Chapter 11)
A four-year waiting period is required, measured from the discharge or dismissal date of the bankruptcy action.
Exceptions for Extenuating Circumstances
A two-year waiting period is permitted if extenuating circumstances can be documented, and is measured from the discharge or dismissal date of the bankruptcy action.
Bankruptcy (Chapter 13)
A distinction is made between Chapter 13 bankruptcies that were discharged and those that were dismissed. The waiting period required for Chapter 13 bankruptcy actions is measured as follows:
- two years from the discharge date, or
- four years from the dismissal date.
.Foreclosure
A seven-year waiting period is required, and is measured from the completion date of the foreclosure action as reported on the credit report or other foreclosure documents provided by the borrower.
Deed-in-Lieu of Foreclosure, Pre-foreclosure Sale, and Charge-Off of a Mortgage Account
These transaction types are completed as alternatives to foreclosure.
- A deed-in-lieu of foreclosure is a transaction in which the deed to the real property is transferred back to the servicer. These are typically identified on the credit report through Remarks Codes such as “Forfeit deed-in-lieu of foreclosure.”
- A pre-foreclosure sale or short sale is the sale of a property in lieu of a foreclosure resulting in a payoff of less than the total amount owed, which was pre-approved by the servicer. These are typically identified on the credit report through Remarks Codes such as “Settled for less than full balance.”
- A charge-off of a mortgage account occurs when a creditor has determined that there is little (or no) likelihood that the mortgage debt will be collected. A charge-off is typically reported after an account reaches a certain delinquency status, and is identified on the credit report with a manner of payment (MOP) code of “9.”
A four-year waiting period is required from the completion date of the deed-in-lieu of foreclosure, pre-foreclosure sale, or charge-off as reported on the credit report or other documents provided by the borrower.
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