Before exploring the aspects of conventional loan requirements and their benefits, let’s begin with an eye-opening statistic. In 2024 Americans owe $12.59 trillion on mortgages. We can all agree that $12.59 trillion is a staggering number. No wonder there are so many rules in place to ensure the safety of our money. Loan programs can be a little confusing, and to fully understand how these loans can work for you, let’s break down some of the terms you will hear when you speak with a lender or real estate agent.
Unquestionably, these incredible numbers prove that the American dream of home ownership is alive and well. The real estate market is intricately layered, utilizing several beneficial aspects of our banking system to leverage debt and secure property. To identify which loan is best for qualifying borrowers, you must break down the multiple types of mortgages available. Specifically, we will educate you on conventional loan requirements and why this popular loan may provide the best mortgage for you.
What is a conventional loan?
Simply put, this is a type of loan that you personally guarantee with good credit, a solid work history, and your own money. The bottom line is that there has to be a sizable guarantee put in place to protect the lender in the case of foreclosure. A traditional conventional loan requires a 20% down payment that secures the bank’s investment. (That being said, there are exceptions to this rule.)
So how do you know if you meet conventional loan requirements?
If you don’t understand these terms, they will be explained below.
- You’ll need a 620 minimum credit score for eligibility.
- Your (DTI) can be no more than 45%
- Minimum down payment of 3%, or 20%, to avoid PMI
- Appraisal of property to verify its value
Conventional loans are different from FHA loans.
With FHA loans, the Federal Housing Administration, a government agency, backs the investment for you. These home loans must be insured for the life of the loan with a mortgage insurance premium (MIP), be a single-family home, and be your primary residence. You can get into an FHA loan option reasonably easily and for very little down, so often, government-backed loans are an excellent option for first-time home buyers.
Properties that meet conventional loan requirements require less underwriting.
Congress created Freddie Mac and Fannie Mae. They perform an essential role in the nation’s housing finance system – to provide liquidity, stability, and affordability to the mortgage market. They provide liquidity (ready access to funds on reasonable terms) to the thousands of banks, savings, loans, and mortgage companies that make loans to finance housing. In truth, the conventional loan requirements they have in place are beneficial; however, the repairs and level of standard that the property must meet before closing can delay underwriting and ultimately prolong the lending timeline.
Conforming conventional loans (meet the guidelines) and non-conforming loans (don’t meet the guidelines) are significantly helpful in the real estate market because they offer less strict property guidelines than FHA loans. Frequently, home buyers often have to perform lengthy repairs to qualify for their loan. Conventional loans are subject to the conforming loan limit set by the Federal Housing Finance Agency. Search here to find the conforming loan limit for most areas of the U.S.
Great for second homes.
Many investment properties and second homes are financed with jumbo loans. A jumbo loan is a non-conforming loan exceeding the maximum loan limit established by the Federal Housing Finance Agency (FHFA). This U.S. regulatory agency oversees the secondary mortgage market and its players. It sets the maximum loan limit for the amount each person can borrow.
Let’s talk about loan-to-value (LTV)
In a nutshell, LTV is your loan amount versus the property value. LTV plays a massive role in conventional loans because once you reach an 80% loan value, you no longer have to pay private mortgage insurance (PMI), and it will significantly lower your payment to your lender. For this reason, if you have a larger down payment, you can come in with 20% down and never have to deal with PMI at all.
Unique & Customizable loans to meet your needs.
Suppose you only need to fund a mortgage for ten years. Conventional loans have options. Additionally, perhaps you want that loan to have an adjustable-rate mortgage; conventional is the way to go. Conventional loan types are often the only option for these situations, assuming the property meets conventional loan requirements. FHA, USDA loans, and the Department of Veterans Affairs (VA Loans) have more complicated restrictions. Since you personally guarantee the loan, most conventional home loans have a ton of security.
When it comes to conventional loan requirements and taxes, you have options.
You can decide whether or not you want your loan officer to add the tax payments to the mortgage or if you prefer to pay them separately. The versatility of a conventional loan is most certainly appealing.
Credit – Down Payment – Proof of Income
How is your financial situation? It matters because conventional loans require a strong credit history to qualify for lower interest rates and be approved. Remember those credit score requirements are set to 620 as the minimum credit score. For this reason, paying off credit cards and avoiding large purchases that may affect debt-to-income ratios leading up to the loan application process is advisable.
Maintaining good credit is probably the most important step in home-buying because paying a higher interest rate can push you out of loan qualification if your monthly mortgage payment is too high for your DTI. Of course, your down payment will be essential also, so maintaining financial structure and stability is imperative. Remember that you will incur closing costs, and those payments must also be provided.
Keeping yourself organized
“I will prepare, and someday my chance will come.” ― Abraham Lincoln. Preparation is your best friend when you are getting ready to navigate the realm of home financing. With this intention, we recommend organizing paystubs (to prove monthly income), tax returns ( especially for the self-employed), student loan paperwork, and files organized leading up to the loan application. The more you can pre-plan and be prepared, the easier the home-buying process will be. Most importantly, organized and prepared borrowers become every lender’s favorite clients.
Why wouldn’t a conventional loan be a good option?
- When you don’t prioritize personal finance and have lower credit scores.
- (PMI) Mortgage insurance requirements.
- They have much higher down payment requirements.
- How good is your credit? With higher credit score requirements, some borrowers don’t qualify.
- More paperwork. Sometimes, they can be harder to get than an FHA or other government-backed loans.
7 Great things to consider in choosing a conventional mortgage loan
- Conforming conventional loans comes with security and peace of mind because the property has proven sound.
- Non-conforming conventional loans are flexible and require little to no upfront repairs for loan qualification.
- You can cancel PMI at 80% LTV.
- There are no restrictions for property types, rentals, second homes, investments, etc.
- More loan program options
- There is no restriction on how many conventional loans one person has.
- No maximum loan limit
- The flexibility of fixed rate and adjustable rate mortgages.
Understanding conventional loan requirements is only the first step
Finding a trustworthy mortgage lender who will guide you through the process is crucial. You want to find a lender that is diligent in getting you competitive mortgage rates and someone with experience.
Your home plays a significant role in financial security. So, regarding your mortgage loan, you want to be sure you’re making responsible decisions. Undoubtedly, the loan process invokes insecurity in many people. In particular, navigating through a sea of paperwork and financial jargon can be unsettling without honest guidance. In fact, a lack of clarity can lead you down the wrong path and compromise your financial future.
Mortgage Insider has helped thousands of families reach their goals to create stronger financial futures. You deserve to work with a lender who brings clarity and has your best interest at heart. Whether you’re looking to purchase a home, help with refinancing, or looking to lower interest rates, Mortgage Insiders ensure that you have made the best decision for the life of your loan.
3 Simple Steps:
- Schedule a Call: An experienced loan officer can discuss your needs and guide you through the possibilities.
- Get Approved: We’ll help you through the application process and facilitate the steps for approval.
- Exhale: Put your feet up and feel secure knowing you made the best decisions about your home loan.
With proper guidance, you can get your first home, accommodate your growing family, and start that renovation project—whatever goal is on the horizon. An alliance with Mortgage Insiders will give you the confidence to know that your mortgage loan is setting you up for financial success. Mortgage Insiders offers today’s latest financial news and mortgage trends. Check out their channel for current events.
