About Conventional Loans

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We know the process of shopping for a mortgage can be confusing. There are many types of mortgages available to potential homeowners and the requirements for qualifying for each are very different.

To help clarify things a bit, we’ll be posting an explanation of some different loan solutions that are available, along with the basic requirements for each.

Today, we’ll talk about Conventional Loans.

Almost any mortgage company, bank, credit union or broker can offer a conventional loan. Unlike FHA or VA loans, which are insured and guaranteed by the federal government, conventional loans are not. That means the requirements for obtaining a conventional loan are a bit more stringent. In order to qualify, borrowers need to have good credit and quite often, a sizable down payment.

The standard down payment for a conventional loan ranges between 5% and 25% of a home’s value depending on the borrower’s credit and current financial situation. A borrower’s DTI (debt to income ratio) must also fall between certain ranges. (We’ll talk more about debt to income ratios in a future post).

The maximum DTI ratio varies from lender to lender. For example, Fannie Mae’s maximum total DTI ratio is 36% of the borrower’s stable monthly income, BUT the maximum can be exceeded up to 45% if the borrower meets the credit score and reserve requirements. What does this mean to you? Your monthly bills and existing debt has to stay within these ranges.

Your credit score also plays a big role in whether or not you are eligible for a conventional loan. Most lenders require a minimum score of 620, however, if you plan to make a down payment lower than 20%, this credit score requirement may increase.

What is so great about a conventional loan?

Because they don’t require government approvals, conventional loans typically have a shorted application to closing time. The requirement for mortgage insurance also reduces a bit because of the higher down payment requirement. Because folks who qualify for conventional loans typically have stable incomes and good credit, they might qualify for better interest rates or lower fees. All of which are great reasons to manage your finances well!

 For additional information or explanation about conventional loans and your personal requirements, reach out to us. We’re always ready and willing to talk you through your options!