Convetional Loans

Conventional Loans

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Conventional Loan Definition: A Conventional loan is a mortgage loan that is not insured or guaranteed by any agency of the state or the Federal Government. Conventional Loans are Insured Privately. These are loans that are sold to FNMA or FHLMC or held in a portfolio (by a bank or S&L and not sold). "JUMBO" loans are also considered as conventional financing because they are loans that exceed the FNMA and FHLMC limits.

LOAN LIMITS: The loan limits for FNMA and FHLMC change every year to specific areas with different loan limits. These are considered conforming loan limits (conforming to FNMA or FHLMC guidelines). Click Here for up-to-date Loan Limits from Fannie Mae

Basic Guidelines for Conventional Loans:

FNMA and FHLMC: The guidelines set forth by both of these institutions are the most widely quoted in the industry today. Lenders of all kinds use these rules as a standard for their underwriting criteria. There is an actual book in which these guidelines are published, it is lengthy and is constantly changing as the laws change or the money supply becomes tighter or looser.

JUMBO LOANS: The guidelines for Jumbo loans vary from lender to lender depending on which conduit the lender sells to. The best way to determine how to structure a Jumbo loan is to contact your MAE Capital Mortgage management or processing.

INTEREST RATES: Will vary from lender to lender because of the reserve requirements of banks as are set forth by the government. As a general rule Jumbo loans will have a higher rate due to the lack of demand in the secondary market. For best results regarding interest rates contact a mortgage broker, they will have access to most all the lending sources thus being able to offer the best rates on any given day.

PRIVATE MORTGAGE INSURANCE (PMI): Mortgage insurance is required on loans above 80% loan-to-value (LTV) on loans sold to FNMA and FHLMC. The alternative to having a separate Mortgage Insurance payment is Lender Paid Mortgage Insurance (LPMI) and that can be done on loans up to a 95% Loan To Value. Mortgage Insurance ensures the lender that if there is a default situation they will be compensated for a percentage of the outstanding loan balance. There are only a handful of PMI companies and their rates are all competitive. Usually, the lender makes the choice of company for the borrower. PMI companies will insure loans up to 95%-100% LTV.

DEBT-TO-INCOME RATIOS DEFINED: Debt-to-income ratios are best defined as the percentage of the house payment to the total gross monthly income, and the house payment plus monthly bills (minimum payments due) to total gross monthly income. Thus a front ratio and a bottom ratio respectively. These ratios may vary from loan program to loan program and from lender to lender. However, FNMA and FHLMC have established guidelines that the lenders are supposed to follow.

THE 4 "C's" to be Approved for a Home Loan:

1. Credit: How is the borrower's credit? It is important to take into consideration what the potential buyer's credit score is and how they handle their personal credit. This will give the underwriter an indication of how they will handle the mortgage payment, and whether they will make the payment on time or not.

2. Capacity: The capacity of the borrower is to be able to show the ability to make the mortgage payment. This is verified by checking the income of the buyer through their tax returns, pay stubs, and regular deposits to their bank account. The stability of the borrower's job will also be taken into consideration.

3. Collateral: The amount of down payment or equity that is being put into the house and the overall value of the home. The house is actually the lender's collateral and the more equity in the home the less likely the borrower will walk away from the home and the loan. The cash the borrower has in their bank accounts and investments is also taken into consideration as the more money left in the borrower's possession after the consummation of the loan the less likely they will default.

4. Character: A borrower's Character will generally be shown by the way they handle the other "C's". The borrower's character is important to show as the more you can show the borrower's willingness to make the payments the less risk is involved with making the loan. This is where the borrower's actions with regard to the way they use credit, the way they handle their savings, and the length of time in a profession will show an underwriter if they are a good credit risk or not.

Underwriting Needs To Verify:

CREDIT: The next step in the qualification process is to check credit. The borrower must have acceptable credit it doesn't have to be perfect but within reason. The underwriter makes the final decision on credit so it is best to get it cleared upfront. In order to get a Conventional loan you must have a minimum Credit Score of 620.

EMPLOYMENT: Must be able to verify two-year employment history. An employment history may include schooling and maternity leave. All gaps in employment must be explained. If a buyer is self-employed they must show at least a two-year record (Tax Returns). Regular Salary Employment does not require tax returns.

FUNDS TO CLOSE: Must be able to verify at least a 3-month history of the funds. Gift funds are acceptable; however, the donor's funds must also be traced to a source (i.e. bank statements, or verification of deposit). The borrower must have at least 5% of their own funds to close.

OTHER RENTAL PROPERTY: If a Borrower has other property that they rent for income, they must provide 2 years Tax Returns, and the income will be calculated from 75% of the gross rents or Actual Rents as Submitted on the Tax Return.

CO-BORROWERS: These are acceptable whether or not they are related. Some lenders require all borrowers to occupy the property others do not. Note also that FNMA requires that the primary occupant's bottom ratio not exceed 45%.

BANKRUPTCY: As a rule, you need 4 years of seasoning on a chapter 7 bankruptcy before you can buy and 2 years for a Chapter 13.

CONVENTIONAL PROPERTY QUALIFICATIONS: A property must meet a minimum standard in order for it to be considered for standard conventional financing. Property zoning is an important factor, it must be zoned residential or has to be conforming to the area (i.e. it has to be common to the area). Note the ultimate decision is up to the appraiser and underwriter. We can view a property before it is listed to determine if it will be able to be funded.

SPECIFICATIONS: Properties should be in areas with paved streets and amenities already in place. The total land to value should not exceed 40%. The age of the property is important, it should have an economic life of more than 30 yrs.

APPRAISALS: These are good for up to six months after completion. The cost of an appraisal for a single-family range from $650 to $1,500, a duplex $1000 to $2,000, a triplex $2,000 to $3,000, and a four-plex $1,500 to $4,000. The price ranges are due to different fee schedules charged by the different Appraisal Management Companies.

Conventional Loan Products

1. 30,25,20,15,10 Year Fixed Rate Loans
2. 3/1,5/1, 7/1 10/1 Adjustable Rate Mortgages that are fixed for 3, 5, 7, and 10 years respectively.
3. No Mortgage Insurance Loans up to 95% Loan to Value with Lender Paid Mortgage Insurance.
4. High Balance Loans with Conforming pricing to $726,525 in all counties in California
5. Home Ready Loans up to 97% LTV with a 640 or better Credit Score
6. Escrow Holdbacks are available for work under certain circumstances.
7. Loans for Condominiums, Townhomes, and other properties with Home Owners' Associations.
8. Ask About our NO MI with 15% down Save 5% with this program! HOT Product!
9. We have many first-time homebuyer products and they are changing all the time so give us a call and we can go over your options.
10. We have Freddie Mac Home Possible and Fannie MAE Home Ready which requires only 3% down that can come from flexible sources. We have negotiated lower Mortgage Insurance Rates on these products.

AAA Borrowers

A triple "A" Borrower is a borrower that has great credit with a score above 700 and has a 20% or more down payment. People that are in this club get the best Interest Rates available and get far easier underwriting with fewer conditions. If you fall into this club simply alert our Loan Officer when talking with them that you are AAA and you will be amazed at the interest rates we can get for you. Our lenders are paying for AAA borrowers and that gain is transferred directly to you in the form of lower interest rates and fees.

Loan Comparisons

The difference between a conventional Loan and a Government loan (FHA or VA) is how the loan is insured. A conventional loan will require private mortgage insurance unless you put more than 20% down on a home or have a 20% equity position in an existing property. All other documentation requirements these days are the same as government loans.

Underwriting for Conventional Loans has become very interesting since the financial meltdown and the insurgence of the Consumer Financial Protection Bureau (CFPB). The financial meltdown uncovered several areas in lending where fraud was found in standard Conventional Loans, so in efforts to thwart this activity, additional checks and balances have been put into place designed to protect the lenders from potential loss from illegal activity. By putting these measures in place lenders are now required to do additional checks of borrowers social security numbers, income, and income history, IRS checks to make sure the tax returns provided to the lenders are the ones the borrower actually filed, and the following of large deposits to a borrower's bank account. All these measures imposed by the CFPB (the Government) are supposed to be for the protection of the borrower and in effect hurting the buyer's ability to qualify for these loans as irrelevant deductions and personal deals of the borrowers end up hurting them in qualifying.

When applying for Conventional loans be patient we are going to ask for explanations of just about everything you have done with your finances for the last 2 years. As Originators we know when we have good clients, but these new rules make us check everything so be patient we will be there to help you through the process.

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