(Newswire.net — July 20, 2022) –A conventional home loan is one of the most popular mortgage products for individuals with a healthy credit score and a steady income stream. These loans offer favorable terms, rates, and payments because they aren’t as much of a risk for the home loan lender as assistive or federally backed programs, such as FHA loans. To qualify for a conventional home loan, you’ll need to follow a specific procedure and have enough money on hand to make a down payment at the time of purchase. To get started with the process of applying, you should speak with a reliable local loan advisor that understands your homebuying plans and goals.
In this article, we’ll review how a conventional home loan works and help you identify if this type of mortgage product is right for your situation. We’ll also look at some of the typical requirements associated with these loans and discuss how you can initiate the process of applying for a loan and thereby purchasing your new home as soon as possible.
What is a Conventional Loan?
Conventional home loans are mortgages that are not insured or guaranteed in any way by the federal government. When you work with a loan advisor, the company they work for usually assists with setting up the mortgage terms. Many conventional home loans are described as “conforming” because they follow the specific rules and regulations set out by Freddie Mac and Fannie Mae. The conventional loan requirements are typically much more strict than government-assisted loan arrangements, such as FHA loans and VA loans. As a result, you’ll usually need to make a higher down payment and have a credit score of 680 or higher.
Requirements for Conventional Loans
To be approved for a conventional home loan, you’ll need to meet a specific set of financial requirements, including a percentage-based down payment and credit check. While the figures below regarding these requirements are most often true, there may be some variability depending on the terms and conditions of the mortgage.
Down Payments for Conventional Loans
Certain conventional loans, depending on your location and provider, may require a down payment that’s as low as 3.5%. However, the ideal down payment for a conventional product is 20% because it allows you to avoid paying for private mortgage insurance (PMI). Given the current home prices in the United States, 20% can seem quite steep. Most of the time, you’ll be in a comfortable financial position with a down payment of around 10% instead. Unlike FHA loans, you shouldn’t have to worry about paying for a mortgage insurance premium (MIP), even if you’re planning on making a lower down payment.
Down Payment Assistance for Conventional Loans
No matter what type of loan you’re applying for, there are a handful of government assistance programs available to help make the path towards homeownership more affordable. These programs can assist you with managing the expenses associated with a variety of mortgage products, including conventional loans. To learn more about these programs as they relate to conventional mortgages, speak with a loan originator.
Credit Score Requirements
Conventional loans in the United States require a credit score of at least 620. In most situations, however, this minimum is actually 680. The higher your credit score, the more favorable your mortgage terms will be, with very few exceptions. In addition to maintaining a healthy credit score, you’ll need a debt-to-income ratio of 50% or less.
Purchasing Restrictions for Conventional vs. FHA and VA Loans
Conventional loans are the type of product you’ll need for purchasing investment properties. Other loan programs and buyer assistance programs, such as the FHA and VA programs, require the home you’re purchasing to operate as your primary residence. With a conventional mortgage, you have considerable freedom for how you use your loan. However, the loan cannot be used to purchase commercial property. No matter what type of loan or property you’re looking to obtain, a loan advisor can help you decide the right path towards homeownership.
What Are the Rates for Conventional Mortgages?
The rates for conventional loans change regularly and as of 2022, are continuing to increase. The rates for conventional home loans are usually lower than FHA loans but slightly higher than VA loans. A reliable loan originator can help you determine what your rate will be and will help you get a term and rate that matches your goals as a homeowner or investor.
How Much Can Sellers Contribute in Closing Costs for a Conventional Loan?
The amount the seller can contribute toward closing costs depends on the loan-to-value (LTV) ratio and the down payment of the buyer. If the down payment is below 10%, the seller can contribute up to 3%. For down payments between 10% and 25%, the limit becomes 6% of the home’s cost. If the down payment is even more substantial, the seller can contribute up to 9% of the sales price in closing costs.
How to Get a Conventional Home Loan
Buying a home is an investment in your and your family’s future. It can quickly become a stressful process if you’re not prepared. For homeowners seeking to get approved for a mortgage with favorable terms and rates, a conventional home loan might be a good fit. In most cases, you’ll need a more substantial down payment than other loan programs. You will also need a favorable credit score of at least 620.
If you’re ready to start the journey towards homeownership, you’ll want to speak with a reliable, local loan advisor and originator, who can help you achieve your goals with a favorable rate and term.