Conventional Loans

Key Takeaways of Conventional loans:

• Down payments as low as 3%
• Fixed and adjustable rate options
• Wide range of repayment terms
• Minimum credit score of 620, in most cases.
• A conventional mortgage or conventional loan is a homebuyer’s loan that is not offered or secured by a government entity.
• It is available through or guaranteed by a private lender or the two government-sponsored enterprises (GSEs): Fannie Mae and Freddie Mac.
• Potential borrowers need to complete an official mortgage application and supply required documents, their credit history, and current credit score.
• Conventional loan interest rates tend to be higher than those of government-backed mortgages, such as Federal Housing Administration (FHA) loans.

Special Considerations for a Conventional

Mortgage or Loan

These types of loans are not for everyone. Here’s a look at who is likely to qualify for a conventional mortgage and who is not.

Who May Qualify

People with established credit and stellar credit reports who are on a solid financial footing usually qualify for conventional mortgages. More specifically, the ideal candidate should have:

• A fair or better credit score. A credit score is a numerical representation of a borrower’s ability to pay back a loan. Credit scores include a borrower’s credit history and the number of late payments. A credit score of at least 620 and possibly higher can be required for approval. Also, the higher the score, the lower the interest rate on the loan, with the best terms being reserved for those with an excellent score.12
• An acceptable debt-to-income (DTI) ratio. This is the sum of your monthly debt payments, such as credit cards and loan payments, compared to your monthly income. Ideally, the DTI ratio should be around 36% and no more than 43%. In other words, you should spend less than 36% of your monthly income on debt payments.13
• A down payment of at least 20% of the home’s purchase price readily available. Lenders can and do accept less, but if they do, they often require that borrowers take out private mortgage insurance and pay its premiums monthly until they achieve at least 20% equity in the house.

In addition, conventional mortgages are often the best or only recourse for homebuyers who want the residence for investment purposes or as a second home, or who want to purchase a property priced over $500,000.

Who May Not Qualify

Generally speaking, those who are just starting out in life, those with a little more debt than normal, and those with a modest credit rating often have trouble qualifying for conventional loans. More specifically, these mortgages would be tough for those who have:

• Suffered bankruptcy or foreclosure within the past seven years
• Credit scores below 650
• DTI ratios above 43%
• Less than 20% or even 10% of the home’s purchase price for a down payment

However, if you’re turned down for the mortgage, be sure to ask for the reasons in writing. You may qualify for other programs that could help you get approved for a mortgage.

For example, if you have no credit history and are a first-time homebuyer, you may qualify for an FHA loan. FHA loans are tailored specifically for first-time homebuyers. As a result, FHA loans have different qualifications and credit requirements, including a lower down payment.

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