Definition of ‘conventional mortgage’ from Investopedia.com
“A type of mortgage in which the underlying terms and conditions meet the financing criteria of Fannie Mae and Freddie Mac…”
Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) are the largest buyers of home mortgages today through mortgage-backed securities. Both Fannie Mae and Freddie Mac are government sponsored companies, or GSEs. Today, if you’re trying to get approved for a conventional loan, you must meet at a minimum the lending guidelines or financing criteria set forth by Fannie Mae or Freddie Mac. Unfortunately, almost all lenders that make conventional mortgage loans impose other stricter guidelines to conventional loans.
Have you ever been told that your FICO score wasn’t high enough for a conventional loan or that you must have a 20% down payment for a conventional loan? A minimum FICO score or a minimum 20% down payment for a conventional loan are stricter guidelines that the lender or bank imposes on a mortgage loan, and are not guidelines set by Fannie Mae or Freddie Mac. What if you could have a conventional loan backed by Fannie Mae or Freddie Mac guidelines with no minimum FICO score requirement with a down payment requirement as low as 5%? This is what you can have when your loan is underwritten to GSE standards with no overlaps. There are lenders that will underwrite directly based on Fannie Mae or Freddie Mac guidelines with no overlaps. The real job for you is to find them.
Today, conventional loans are very popular and it seems like every bank or lender has conventional loans available for home loans and refinancing. Despite the enormous popularity of conventional loans, the truth is that finding a true or real conventional loan is like finding a needle in a haystack. The reason real conventional loans are hard to find is that banks and lenders will endorse Fannie Mae or Freddie Mac guidelines, but then impose their own additional stricter guidelines on top of these guidelines. These additional guidelines for lenders or banks are often known as investor or lender overlays. Both Fannie Mae and Freddie Mac do not restrict banks and lenders from adding overlays, as long as the banks and lenders meet Fannie Mae or Freddie Mac’s minimum requirements and guidelines.
Have you ever played a game where the rules of the game kept changing? It’s almost impossible to win when the rules of the game keep changing. Well, this is the effect lenders or bank overlays have on home loan approvals. They change the rules. What’s worse is that sometimes these rule changes surprise and derail a transaction or screw it up completely.
If you’re looking for a home loan or a refinance and you’re talking to a loan officer, try this exercise. Ask your loan officer what is the minimum FICO score a borrower must have for a conventional loan. Each loan officer will likely respond with a different minimum FICO score number. You will probably find that the most popular answers are 720, 700, 680, and 660. Wow! What game. Did you know that neither Fannie Mae nor Freddie Mac have minimum credit score requirements for their loans? As soon as the loan officer answers your question about conventional loan minimum FICO requirements with any FICO score, he or she will tell you that the loan officer works for a lender or bank that has overlaps because a minimum score requirement is an overlap.
Banks and lenders are adding their own minimum FICO score requirements to the Fannie Mae and Freddie Mac guidelines. Of course, the FICO score is just the beginning of your frustration, pain, and heartbreak. There are more overlays for every conceivable situation you can think of and then some. Like a game where the rules are constantly changing, the overlaps can be frustrating, but even worse, it’s not a game anymore. It’s your life, your family, your finances and your home!
Whether you’re refinancing your mortgage or need a purchase loan, find a lender that has no overlaps and your home loan process will be much less stressful.