What is a Conventional Loan?
A Conventional Loan is a loan that is not backed by a federal agency but instead backed by private lenders such as banks and mortgage companies, or government-sponsored entities like Fannie Mae or Freddie Mac. This type of loan may feature a lower down payment than other loan types and have terms that typically range from 10 to 30 years.
What are the requirements for a Conventional Loan?
To qualify you must meet the minimum requirements as outlined below:
- Primary residence or investment
- 3% Down (first-time homebuyer only)
- Minimum 600 credit score
- No issues with bankruptsy or foreclosure in the last 7 years
- DTI Ratio below 45%
- Minimum 3% down payment
What are the advantages of a Conventional Loan?
- More options
- No mortgage insurance if you put more than 20% down
- Cancel existing mortgage insurance at 80% LTV
- Better rates depending on credit score
- Down payment can be a gift
- Seller allowed to contribute towards closing costs
How do you get pre-approved?
Getting pre-qualified means you meet the standards set by the lender, but pre-approval is much more valuable in the borrowing process. The borrower is vetted by the lender, documents checked, credit is verified, and approved for a specific loan amount for a set amount of time. Being able to present a pre-approval letter shows sellers you’re a qualified buyer, something that can help you land your dream home in an ultra-competitive market. You’ll need:
- A full mortgage application
- Possible application fee
- Financial documentation
- Credit pull
What documents will I need for a home loan?
Documentation may vary per individual but you can anticipate a certain set of documentation to be required for almost any loan. Usually, you will need to provide:
Items to be gathering for the Loan are:
- Last 30 days of pay stubs.
- Last 2 years of Federal Tax Returns with schedules or business expenses if filed with the returns for 2018 & 2019.
- Last 2 years of W-2’s or 1099’s
- Clear photo image of your Driver’s License.
- 60 days of bank statements, all pages even if the last page states intentionally left blank.
- Last statement from any 401k, investment or retirement accounts, all pages.
What costs can you expect when you apply for a conventional loan?
There are a few costs associated with the home buying process, and we will break them down below.
The most common fee associated with purchasing a home is appraisal and inspection fees.
In order to determine the value of a home, a third-party appraisal is almost always required. This fee can range in price anywhere from $300-$1000 dollars.
A home inspection is usually required to determine the livability of the home. Home inspectors look to make sure the home is structurally sound.
A credit report is required to move forward with the loan process, and the process of pulling credit usually results in a fee. This fee is typically less expensive ranging from $50-$100.
Lending origination fees. Lending origination fees are typically a flat fee paid to the lender composing your loan.
Title Fees are required fees that are paid to the title company, such as the title search fee and the cost of title insurance usually required by the lender.
HOA fees may be required if the home you are purchasing has a Home Owner’s Association. Some HOA’s require you to “join” which usually comes with a fee that needs to be paid upfront.
Other fees may come up during the loan process, each fee will be outlined on your Loan Estimate form. It’s important to consult your licensed loan professional if you have any questions on any of these items.
Conforming Loan Limits
All conforming loans are conventional but not all conventional loans are conforming. Conventional loans encompass both conforming loans, loans that meet certain size limits and parameters, and jumbo loans, loans that exceed those parameters.
Due to the substantial uptick in home values over the past 2 years, borrowers are being squeezed into jumbo loan products to obtain financing for homes that would have qualified under conforming financing even just 12-18 months ago. Jumbo loans carry higher rates, larger down payments, and more stringent qualifying requirements.
A recent increase in conforming loan limits will temporarily allow Geneva’s borrowers the opportunity under today’s unusual market circumstances to obtain conventional financing at lower rates rather than being forced into a jumbo loan. This change to $647,200 for one-unit properties in 2022 will make conforming conventional loans far more attractive to many buyers.
Curious to see what the loan limits are in your county? Use our interactive tool below:
Conventional vs. FHA
With all of this, you may be asking, “What is the difference between a conventional loan and an FHA loan?” Well, there are a few key differences:
- FHA loans are backed by the government
- FHA loans require a minimum of 3.5% down payment
- FHA loans allow for credit scores as low as 580, or even lower with a higher down payment
- FHA loans require a DTI of 50% or lower
- FHA requires mortgage insurance
Comparing this with the requirements for a conventional loan, you’ll start to see the difference. And determining which is better for you is all based on your situation.
How to Move From FHA to Conventional
Thinking a conventional loan may be a better fit? Here is how to transition from an FHA loan to a conventional loan through refinancing:
- Talk with your chosen lender
- Complete full application
- Get approval from FHA
- DTI should be around 43% or lower
- 620 credit score or better
- Consult on potential appraisal
- Pay closing costs and close
Conventional vs. VA
But what if you qualify for a VA loan? VA loans require no down payment, no mortgage insurance, and the minimum credit score requirement can often be much lower than with a conventional loan. However, conventional loans don’t have the same additional fees such as the upfront funding fee and loan origination fee that a VA loan would require. And if you’re buying a second home or investment property, a VA loan isn’t even an option. This is another instance where your situation will determine the right loan for you.
Conventional loans can have a lot of benefits, but no loan type is perfect for everyone. Speak with a licensed loan officer today to discuss the pros and cons and find out what program is right for you.
Want to see what your home payment might look like? Use our mortgage calculator below: