Am I Eligible?
In order to qualify for a conventional loan, borrowers must typically meet three basic requirements:
The standard down payment for a conventional loan is anywhere between 5% and 25% of a home's value depending on the borrower's credit and financial condition. For example, a $100,000 home would require a $20,000 down payment. However, depending on a lender's unique specifications, a borrower may be able to put down as little as 5% at closing. Just keep in mind, this option is typically only available to those with exceptional credit and financial profiles.
To qualify for a conventional loan, your monthly mortgage payments and monthly non-mortgage debts must fall within certain ranges. For example, a lender may require your monthly mortgage payments (which may include taxes and insurance) not exceed 28% of your gross monthly income. In addition, your monthly mortgage payments, when combined with your other monthly debt payments (car loans, student loans and credit card bills), may be limited to a maximum of 36% of your gross monthly income.
Your credit score also plays an integral role when qualifying for a conventional loan. In fact, most lenders require a minimum FICO credit score of around 620 to obtain approval. And, keep in mind, if you plan on making a down payment of less than 20%, you may need a FICO credit score greater than 700.
What Does It Mean to Me?
Which type of loan you ultimately receive often will be driven by factors that may not be in your control – such as FICO scores and other factors described above. However, if you have the option to choose your loan type, there are some differences that may be important depending on your financial situation. For example:
Conventional loan processing tends to be more streamlined
since the borrower deals directly with the lender and isn't dependent on government approvals. As a result, conventional loan applications typically have shorter and less complicated approval processes.
It's more likely that you can avoid MIPs with conventional loans than with government insured loans, largely because conventional loans require higher down payments. Even with conventional loans, some lenders may still require MIP depending on your profile, the value of the home and other factors. However, private mortgage insurance can often be obtained at a lower cost than with government-insured loans.
Private lenders may compete for your business if you are deemed a good credit risk because of income, credit score and other factors. Because of this, you may be able obtain a more attractive interest rate.
Conventional loans are offered through private lenders and the fees are not set by the government. This means the fees can vary widely among lenders – not necessarily a bad thing since you might save money. The key is to educate yourself and comparison shop.
Is a Conventional Loan Right For You?
The bottom line is that conventional loans are really only available to borrowers with good credit and available cash for down payments. If you are fortunate to be an attractive borrower, than you might have the ability to obtain a loan at a lower cost and have it processed faster than with a government insured loan.
However, before you decide to apply for a conventional loan, make sure to speak with at least a few mortgage professionals. Remember, each lender offers different rates, terms and fees, so it's best to receive Good Faith Estimates prior to committing to one institution. This additional research will help you secure the best mortgage terms possible for your future home loan!