Conventional Mortgage Information for Home Buyers
When going through a private lender, home buyers are likely to come across offers for a conventional mortgage. They will then need to decide between that loan option and government-backed mortgages. To effectively weigh the decision, it's important for buyers to know the ins and outs of conventional home loans.
What Is a Conventional Mortgage?
Conventional mortgages are home loans that come from credit unions, banks, and other private lenders. Dedicated mortgage companies also tend to offer these loans as their main product.
Except for certain Freddie Mac and Fannie Mae loans, these mortgages are generally not guaranteed by the government. For that reason, most conventional mortgages come with higher interest rates, due to the increased risk to the lender.
As a trade off, many conventional home loans come with fewer eligibility restrictions, like income and asset caps. Borrowers do have to meet the loan requirements, however, to prove that they are capable of paying back what they borrow.
Loan Requirements to Consider
In order to qualify for a conventional home loan, applicants must meet requirements set by the lender, such as:
First and foremost, lenders want to know that their clients can make their loan payments on time and in full. To verify that capability, lenders look at income data to see if applicants are at or beyond the ideal level.
Because every loan situation is different, lenders do not look at set income levels. Instead, they use a debt-to-income ratio of 50% or less to gauge the applicant's financial situation.
Applicants will need to show their pay stubs, tax statements, or other income information to the lender. Then, the lender will compare that information to the debts of the applicant to find the ratio of what they make to what they owe.
Lenders also want to know that applicants have a strong history of paying off the money they borrow. To determine that, they look at each applicant's credit score. For conventional loans, lenders tend to require a credit score of 620 or higher.
Applicants with lower credit scores can work on improving their credit score before applying for a conventional mortgage. By waiting until their scores are higher, they not only improve their chances of getting approved, but may also get lower interest rates.
In the past, it was difficult for people to apply for a mortgage without a 20 percent down payment available. Today, even with conventional home loans, home buyers may only need to have a down payment of 5 percent of the purchase price of the home. If they are a first-time buyer, then the down payment requirement drops to 3 percent to make homeownership more accessible to all.
When someone buys a second home, the down payment requirement jumps to 10 percent, while multi-family home purchases require 15 percent down.
In all situations, the higher the down payment, the better because it offsets the loan amount. Buyers may also receive a better interest rate, may need to make a lower monthly payment, and may avoid having to pay private mortgage insurance.
When buyers seek a conventional mortgage backed by Freddie Mac or Fannie Mae, they also need to pay attention to loan limits. Each year, these entities publish their limits, which is the maximum amount they will loan out to each applicant. The loan limits differ in low to high cost of living areas, but beyond that, remain static for all home buyers.
Applicants who meet all these requirements have a good chance at getting approved for a conventional home loan. Each lender will likely offer different terms, so applicants should check out at least three before settling on the best one. If applicants do not qualify for a conventional mortgage, they can seek out special home buying programs with different eligibility requirements.
How to Apply for a Conventional Mortgage
If home buyers want to apply for a conventional home loan, they will need to go to a mortgage company, credit union, or bank. While there, they will need to fill out a loan application and provide the necessary documents for the lender to review. Then, applicants will have a chance to discuss the terms with the lender and wait for a decision. If the applicant is approved, the lender will provide a pre-approval letter that lets buyers start the search for their perfect home.
From filling out an application to receiving a decision, the entire process tends to take less than a few weeks. During that time, home buyers can look at properties, but they cannot put in an offer.
With all this information in hand, it is much easier for home buyers to find their ideal mortgage option. Then, they can move through the application process with confidence that they're on the right track.