FANNIE MAE Bankruptcy Guidelines on Conventional Loans
This guide covers Fannie Mae Bankruptcy Guidelines on Conventional Loans. In life, financial hardships are a common occurrence for a majority of people. And when these hardships strike, they sometimes leave a lasting mark that might remain for years. What are we talking about? Well, bankruptcy! This is usually a last resort for businesses or individuals looking to discharge or restructure their debts.
Going through bankruptcy is not easy and can be a difficult and emotionally draining experience. It will be a major hindrance in any attempts to obtain a mortgage in the future. The truth is that a bankruptcy discharge is usually a major dent in an individual’s credit report, which lenders view as a red flag, thereby, a high-risk borrower.
And this is particularly true for conventional loans that tend to have stringent requirements. But while all this might be true, you should remember that bankruptcy is not the end of your financial journey. It can be a fresh start or an opportunity to rebuild and regain control over your financial future. This guide will delve into detail on how you can do this, where we will discuss the strategies you can employ to rebuild your credit, plus any other detail you should know as you prepare to apply for a conventional loan after bankruptcy.
What are conventional loans?
Conventional loans are mortgages that adhere to procedures set by Fannie Mae and Freddie Mac, the two primary entities established by Congress. They aim to ensure the mortgage market’s liquidity, stability, and affordability. One major difference between conventional mortgages and other popular loans, such as FHA and the VA, is that conventional mortgages are not backed by federal agencies such as the Federal Housing Administration or the Veteran Affairs. They are funded and insured by private lenders, including banks, credit unions, and mortgage companies. The requirements for conventional loans vary depending on the lender and the specific loan program. However, there are some general requirements and eligibility criteria for conventional loans, which include;
FANNIE MAE Guidelines on credit scores
Conventional loan lenders typically require a good credit score for a borrower to be eligible. And while there is no set minimum score, a score of 620 FICO or higher is generally preferred by most lenders. Borrowers with strong credit scores are more likely to secure favorable interest rates and loan terms.
Down Payment Requirements on Conventional Loans
Borrowers require a down payment to be approved for a conventional loan, typically ranging from 3% to 20% of the property’s buying price. The exact percentage will depend on the borrower’s creditworthiness, loan program, and the lender’s requirements. Also, its worth noting that a larger down payment can help reduce monthly mortgage payments,
and you may not need to pay private mortgage insurance (PMI).
Fannie Mae Guidelines on Debt-to-income Ratio (DTI) on Conventional Loans
The DTI ratio compares the borrower’s monthly debt obligations to gross income. Typically, a borrower’s monthly debts, including the potential mortgage payment, should not exceed a certain percentage of their income. The specific DTI requirements for conventional loans vary from 45% to 50%. Alex Carlucci, a senior loan officer at Mortgage Lenders For Bad Credit explains debt-to-income ratio on conventional loans.
There is no front-end debt-to-income ratio on conventional loans. The maximum back-end debt-to-income ratio on conventional loans is 50%. However, most lenders will have overlays on debt-to-income ratio caps at 45% for lower credit score borrowers as part of their lender overlays. Low debt-to-income ratio (DTI) is preferred by lenders.
The other thing that the lender will analyze is your ability to manage debt responsibly by comparing your monthly debt obligations to your gross monthly income. A lower DTI suggests that you have a lower debt burden and more disposable income to cover mortgage payments, which is an ideal situation many lenders want to see. A DTI of about 36% -43% will be preferable, as it will indicate a healthier financial position.
Fannie Mae Guidelines on Income and employment history
Your income and employment history are important when applying for a conventional loan. The lenders will evaluate your income stability and employment history to assess your ability to make timely mortgage payments. You must provide documented proof of income, including pay stubs, tax returns, and employment verification.
Property Appraisal Requirements on Conventional Loans
Last but not least, the type of property you intend to buy using the mortgage, its condition, and its value also matters to the lenders, which means a professional appraisal will be crucial. So, ensure that the property and its condition meet the requirements set. All this ensures that the loan amount will align with the property’s fair market value.
What is bankruptcy?
Bankruptcy is a legal procedure intended to assist individuals or businesses unable to repay their debts, offering them an opportunity for a fresh financial start, either by discharging certain debts or creating a plan to repay them over time. Bankruptcy laws can differ slightly between states but generally follow similar principles. Various types of bankruptcy exist, but the most prevalent ones in
the United States are:
Fannie Mae Bankruptcy Guidelines on Conventional Loans After Chapter 7 Bankruptcy
Also known as liquidation or straight bankruptcy, Chapter 7 involves the sale of non-exempt assets to repay creditors. Certain debts, including medical bills and credit card debt, can be discharged, meaning they are eliminated and no longer owed. However, not all debts, such as student loans and child support, can be discharged. Chapter 7 is typically for individuals with limited income and few assets.
Fannie Mae Bankruptcy Guidelines on Conventional Loans After Chapter 13
This type of bankruptcy enables individuals to develop a repayment plan to resolve their debts within three to five years. It’s often referred to as reorganization or wage earner plan. It is suitable for individuals with a steady income who wish to keep their assets and catch up on missed payments, such as arrears on mortgages or car loans.
Fannie Mae Bankruptcy Guidelines on Conventional Loans
After a bankruptcy discharge, if you want to apply for a conventional mortgage, a waiting period must lapse before you are eligible. The waiting period serves as a measure for lenders to assess your financial stability and responsible credit behavior following bankruptcy, and it can vary depending on the type of bankruptcy file and the guidelines set by individual lenders.
Chapter 7 bankruptcy
After a Chapter 7 bankruptcy discharge, the waiting period before one can be considered for a conventional mortgage is generally two to four years, with most lenders opting for the two-year waiting period. During this period, borrowers must rebuild their credit and demonstrate responsible behavior. But some lenders would wait up to four years, especially if there are additional risk factors or your credit profile needs more time to recover.
Chapter 13 bankruptcy
Regarding Chapter 13 bankruptcy, borrowers are required for two years before they can be eligible for a conventional loan. There is a four-year waiting period after Chapter 13 Bankruptcy dismissal date. For many lenders, this period is enough for the borrower to re-establish their credit, manage their finances responsibly, and, most importantly, demonstrate a consistent payment history. Remember that these waiting periods are not universal, meaning they can vary from one lender to another. Some lenders may have more lenient requirements or offer loan programs tailored to individuals with a bankruptcy history. Additionally, meeting other eligibility criteria, such as a good credit score, stable employment, and a low debt-to-income ratio, will increase your chances of obtaining a conventional loan. As you wait for the specified period to lapse, it’s crucial to proactively work on rebuilding your credit, as it will greatly improve your chances. With that said, there are several effective strategies you can employ to enhance your chances, including:
Rebuilding your credit
The first, and probably the most significant, action you can take after a bankruptcy discharge is rebuilding your credit, as it is the only method you can employ to improve your financial standing, enhancing your chances for success. A higher credit score improves your likelihood of success, demonstrating to the lenders that you have taken the necessary steps to manage your finances responsibly, thereby reducing the perceived risk of lending. Let’s delve into essential tips and strategies to help you rebuild your credit:
Make timely payments on your bills on time is one of the most important aspects of rebuilding your credit. This includes credit card payments, mortgage or rent payments, utility bills, and other recurring debts. It’s worth considering the establishment of automatic payments or reminders to ensure you consistently remember to make your payments.
Keep your credit card balances low. Here is where we discuss credit utilization, which refers to the proportion of your credit card balance to your credit limit. A borrower must maintain a low credit utilization ratio below 30%. And how can you achieve this? Well, by paying off balances in full every month! By having a mix of numerous types of credit, such as credit cards, installment loans, and a mortgage, you can show lenders of your ability to manage various forms of debt responsibly, earning you some points. So, you should consider
opening a secured credit card or obtaining a small secured loan to establish a positive payment history.
Getting Positive Credit With New Credit
While having credit accounts to build a credit history is essential, be cautious about applying for too many new accounts simultaneously. Every application triggers a hard inquiry on your credit report, which can temporarily decrease your credit score. Apply for new credit only when essential, and conduct thorough research to identify lenders more inclined to approve applicants with a prior bankruptcy. It is also recommended that you check credit reports regularly to ensure that everything and your progress are accurate. If you notice any errors or inaccuracies, report them promptly. Remember that improving your credit takes time and patience. Just continue practicing good financial habits and managing your credit responsibly and consistently, and you will gradually see improvements in your credit score over time. Be persistent and remain determined and committed to your goals.
Saving for a down payment
Secondly, you need to start saving for a down payment, as it is crucial, especially when applying for a conventional loan after bankruptcy. Doing this can be vital in compensating for a lower credit score and increasing the lender’s confidence in your ability to make timely repayments on the loan. Therefore, it is imperative to consider ways to reduce your expenses and boost your savings.
It is very important in your journey! Here are some of the top reasons you should consider this; Reduced loan-to-value (LTV) ratio – A down payment amount determines the initial equity you have in the property, and LTV is the percentage of the property’s value financed by the loan. A larger down payment results in a lower LTV ratio, which reduces the lender’s risk. In addition, putting more money into the purchase demonstrates your commitment and lessens the lender’s exposure in case of default.
With a bankruptcy history on your credit history, your credit score may be lower than desired, making getting approved for a loan more challenging. However, a larger down payment can help offset this risk and increase the likelihood of loan approval, as it will demonstrate your financial stability and dedication to the investment, making you a more appealing borrower.
Fannie Mae Guidelines on Mortgage Insurance
A significant down payment increases the likelihood of securing more favorable loan terms, as the risk to the lender will be significantly reduced. This means lower monthly payments, which, in turn, means more savings. When your down payment is below 20% of the purchase price, lenders generally mandate including private mortgage insurance (PMI). This insurance protects the lender in the event of default. The payment will add an extra cost to your monthly mortgage payment, making the loan much more expensive. However, by providing a larger down payment, you can avoid the need for PMI altogether, saving you money over time.
Demonstrate financial stability
Thirdly, demonstrating your financial stability is another crucial aspect when applying for a conventional loan after bankruptcy. After a bankruptcy discharge, the lender wants reassurance that you can make monthly payments on time and without failing. Now, when we talk of financial stability, here is what we are talking about, according to John Strange of Mortgage Lenders For Bad Credit:
Lenders always prefer borrowers with a stable employment history. Consistency in employment demonstrates reliability as well as a steady income source. In addition, having a track record of continuous employment in the same field or industry can enhance your credibility as a borrower as it indicates that you are less likely to face sudden income fluctuations or job insecurity, thereby increasing the lender’s confidence in your ability to make timely mortgage payments.
Demonstrating a steady and sufficient income is also crucial for conventional loan approval. Lenders will assess your income to ensure that you have the financial capability or means to cover the monthly mortgage payments and other financial obligations timely and without fail. What’s more, consistent and reliable income allows you to meet your financial commitments and reduces the risk of default, making it an essential indicator of financial stability.
Seeking alternative options
If you are still experiencing challenges obtaining a conventional loan, there are always alternatives that you can look into. Some of these alternatives include;
FHA loans
The Federal Housing Administration guarantees these and is quite popular among borrowers with less-than-perfect credit or bankruptcy history. The reason is that the requirements for an FHA loan are generally more lenient than those for conventional loans. For instance, the waiting period after a Chapter 7 bankruptcy discharge is typically two years; for Chapter 13, it can be as little as one year with court approval. In addition, FHA loans also allow for a lower down payment that can be as low as 3.5% of the property’s purchase price and more flexible credit score requirements.
USDA loans
The U.S. Department of Agriculture (USDA) offers rural and suburban property buyers loans through its Rural Development Guaranteed Housing Loan Program. These loans are often referred to as USDA loans and often have more flexible credit requirements, and they do offer 100% financing, which means you won’t need a down payment. While bankruptcy history is considered, there is no specific waiting period after a bankruptcy discharge, even though lenders will still assess your overall creditworthiness.
VA loans
This could be the best alternative for veterans, active-duty service members, or eligible surviving spouses. The Department of Veteran Affairs guarantees this loan, and it also comes with more relaxed credit requirements, including competitive interest rates and no down payment. And when it comes to a borrower with a bankruptcy discharge, there may not be a waiting period. However, the lender will still have to assess your creditworthiness.
Seeking professional help
If you have had a bankruptcy discharge and are looking for a conventional loan, we highly recommend seeking professional help. Responsible credit management – Alongside financial stability, demonstrating responsible credit management, including making timely payments on all your debts, including credit cards, loans, and other financial obligations, is also essential. Dale Elenteny, a senior loan officer at Mortgage Lenders For Bad Credit says the following:
Consistently paying bills on time showcases your commitment to meeting your financial responsibilities and boosts your creditworthiness. Remember also to keep credit card balances low and avoid excessive debt accumulation.
Ultimately, showcasing financial stability, especially after a bankruptcy discharge, is highly recommended as it will present you as a reliable borrower capable of managing monthly mortgage payments. So, you should demonstrate them, with documentation if need be, to increase the lender’s confidence in you. There are several benefits that you stand to gain, including;
Expertise in post-bankruptcy financing
These experts have done this many times. Hence, they have an in-depth knowledge of the loan programs available for borrowers in similar situations. Also, they know the specific requirements, waiting periods, and qualifications for eligibility. With all this information, you will certainly be better placed when you finally submit your loan application.
Customized financial assessment
They can comprehensively evaluate your financial situation, considering factors such as income, debts, credit history, and bankruptcy discharge details, then assess your creditworthiness, identify areas for improvement, and provide personalized recommendations to strengthen your conventional loan application.
Access to multiple lenders and loan programs – You may also reap big from their wide network, as they can connect you with lenders who would understand your situation the best, increasing your chances of getting approved. And when it comes to comparing the different options, they would also come in handy.
Since applying for a conventional loan requires the borrower to submit many documents, a professional would certainly guide you. And now, due to the bankruptcy discharge, extensive documentation will be involved to support your financial stability and creditworthiness. The professional can act as your advocate and be able to negotiate on your behalf. And since they have experience, they might be able to help you secure more favorable terms.
Summary on FANNIE MAE Bankruptcy Guidelines
While bankruptcy might seem like an impossible challenge when applying for a conventional loan, it might not be as hard as you think. You must proactively improve your financial situation while waiting for the set waiting period to lapse. Just be patient and do everything as we discussed in this guide. And if you are still experiencing challenges, there are alternatives you can explore. So, get a mortgage professional and start your journey. It might take time and patience, but with perseverance and responsible financial practices, you can position yourself for success.
