What is a conventional loan? The term conventional loan simply means a loan not back by the government. A conventional conforming loan means a loan backed by Fannie Mae or Freddie Mac.
While conventional home loans differ greatly in their terms and available loan sizes, they share similar guidelines that borrowers must satisfy in order to qualify:
Credit: Generally, borrowers on conventional loans will need to have a credit score of 660 or higher in order to qualify for 95% financing. A small number of lenders will offer loans with as low as a 620 score with larger down payments.
Loan-to-Value Ratio (LTV): Borrowers looking to secure a conforming loan can secure a maximum loan-to-value ratio of 97%, but most conventional loans will require a minimum down payment of 5%.
Debt-to-Income (DTI): Borrowers must have a debt-to-income ratio of 45% or less to acquire a conventional loan.
Documentation: In order to secure a conforming loan, borrowers must present accurate documentation of employment history, income, and assets.
Total Debt: Borrowers with a high amount of debt may have some difficulties qualifying for a conforming loan.
Conforming conventional loans comprise the majority of conventional loans, being more advantageous than non-conforming loans in many ways. In order for a conventional loan to conform to Fannie Mae and Freddie Mac standards, these loans require a credit score of 580 at minimum. However, in order to qualify for 95% financing on a conventional loan, borrowers must have a minimum credit score of 620.
Click here for more information on Conventional Loan Credit Requirements.
Borrowers applying for conventional loans must present documentation to the lender, including address history for the past two years and verification of identity by either a driver’s license or Social Security card.
Additionally, borrowers must provide employment history and salary history, traditionally with pay stubs to prove current and past income. Self-employed, commissioned, or tipped borrowers may need to present additional information, such as the previous two years Federal tax returns or bank statements to prove profits and losses.
The Loan-to-Value ratio (LTV) represents the comparison of the loan amount to the total value of the property. As such, an 80% loan-to-value ratio means that the loan covers 80% of the cost of the property. Traditionally, conventional loans have an LTV of 80% and include a down payment of 20% of the property cost, although borrowers can circumvent this requirement several ways.
For instance, borrowers with mortgage insurance may qualify for a much lower down payment requirement, although these mortgage premiums will be added to a borrower’s monthly payments until he or she owes less than 80% on the home. Under ideal circumstances, conventional loans can finance up to 95% of a mortgage, meaning that borrowers must put down a minimum of 5% for properties that are single-family residences.
To qualify for a conventional loan, you must have an acceptable debt-to-income ratio (DTI). For instance, your monthly mortgage payments, including taxes, insurance, and other charges, must comprise less than 28% of your gross monthly income. Furthermore, your total debt payments per month, including student loans, car loans, and credit card debt, should not amount to 36% or more than your gross monthly income. With good credit, many lenders will let you have a higher debt-to-income ratio, but it may never exceed 45%.
Conventional loans allow borrowers to apply the funds toward a variety of different property types, including condos, planned unit developments (townhouses), modular homes, manufactured homes, and up to 4 family residences. Additionally, conventional loans may finance primary residences, secondary homes, and investment properties.
While the guidelines for conforming conventional loans are written by Fannie Mae and Freddie Mac, you can not get a loan from either one of those companies. You have to get your loan from an actual lender who may have additional rules, known as overlays, on top of the Fannie Mae and Freddie Mac guidelines. The most common overlay is credit scores. While Fannie Mae and Freddie Mac guidelines indicate they may buy loans from lenders with a credit score as loan as 620, most lenders will still require at least a 660 credit score for a conventional loan.
Choosing the right loan program and lender can take some time to ensure that it’s the best fit for your unique situation. As such, always set aside an appropriate amount of time to compare lenders and rates; even fractional differences between interest rates could save or cost you hundreds if not thousands of dollars over the life of the loan. Remember, patience and persistence can make all the difference.
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