A conventional home loan is a mortgage loan that is not backed by the government. Instead, a conventional loan is issued by a private financial institution, such as a bank or a credit union. The private mortgage lender may offer to conform to conventional home loans, non-conforming conventional home loans, or both. Conforming conventional loans indicate that the rules established by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are followed. Conventional home loans typically require a higher credit score than U.S. Federal Housing Administration (FHA) loans, but the interest rates and down payment may be more beneficial for those who qualify.
How Do Conventional Home Loans Work?
A conventional home loan is issued by private mortgage lenders. Many banks, credit unions, and other types of financial institutions offer private conventional home loans. Some may offer both FHA loans and conventional loans. The down payment for a conventional home loan varies. Many lenders require a down payment of three percent, although some may offer 100 percent financing for non-conforming conventional home loans. Most conventional loan lenders require the borrower to pay annual private mortgage insurance unless they make a down payment of 20 percent or greater.
How To Qualify For A Conventional Home Loan
Because conventional home loans involve private lenders instead of being government-backed, they require a higher credit score than FHA loans. Those who qualify, however, often enjoy generous interest rates. To qualify, prospective borrowers typically require a low debt-to-income ratio and no bankruptcy filings within the past 12 to 24 months. The following is an overview of what you can do to ensure you have the best chance at qualifying.
Review Your Credit Score
Since borrowers must have a credit score of 620 or higher, it is important to understand what your credit score is currently. You can review your credit score online, although be sure to choose a website that doesn’t cause your score to drop when you check it. If your credit score is below 620, you may need to improve it before securing a conventional home loan.
Improving Your Credit Score
There are various ways to improve your credit score. If you have debt, paying down your debt as quickly as possible may help. You should also catch up on any late or missed payments as soon as possible, along with disputing any mistakes that appear on your credit report.
Have a Low Debt-to-Income Ratio
The debt-to-income ratio refers to the amount of monthly income that goes towards paying down debt. Someone with a high debt-to-income ratio will have a more difficult time paying a new mortgage. Lenders understand this and are far more willing to provide a conventional home loan to someone with a lower debt-to-income ratio.
Get a Pre-Approval
A pre-approval gives borrowers an estimation of how much a lender is willing to provide. It takes the guessing game out of whether or not the borrower will be approved. It is worth noting, however, that a pre-approval is not an official loan agreement, and the lender will again check the borrower’s credit receiving the mortgage application.
Advantages of Conventional Home Loans
Many borrowers have to choose between a conventional home loan, FHA, USDA, and VA home loan. There are certain reasons to consider choosing a conventional loan when it is an option, including lower interest rates, more flexibility, and acceptance for higher loans.
Lower Interest Rates
Interest rates for conventional home loans are based on the borrower’s credit. Individuals with a higher credit score are often able to get lower interest rates through conventional home loans than they are through FHA. In addition, conventional home loans give the option of either making a higher down payment or refinancing at a later time to avoid mortgage insurance payments.
Conventional home loans are private loans, whereas FHA loans are backed by the government. This gives lenders and borrowers more flexibility, which can make receiving a loan with ideal terms easier. For example, conventional loans are available for secondary residences, whereas FHA loans are only available for primary residences.
High Loan Amounts
The limit for conventional conforming loans as defined by the Federal Housing Finance Agency (FHFA) is around $500,000, depending on the area. Anything that exceeds this amount requires a jumbo conventional loan. Jumbo conventional loans are often easier to acquire than a high loan amount through other loan programs such as FHA or USDA.
Speak to The Georgia Mortgage Brokers at My Lending Pal
Give our team at My Lending Pal a call today to speak to an experienced mortgage broker in Georgia. We can guide you through the home loan process and help you make informed decisions at every step. Our team is happy to take your call to answer any questions you have or set up an appointment to go over your options.