Each individual’s financial situation will impact the type of loan they are eligible for and the type of documentation your lender will ask you to provide in order to qualify for the requested financing.
Loan types range from Conventional, FHA, VA, and USDA. Some driving factors that will determine the type of loan product you qualify for will be your credit score and the amount of money you have available for a down payment.
The amount of funds you have available for your down payment will make a difference on the programs you will be eligible for. As a buyer the sooner you can be proactive in saving up a sizable down payment will increase the opportunity of you qualifying for a conventional loan.
Taking action to put aside a monthly amount for your expected home purchase will become second nature/ muscle memory. The amount you are putting aside should be close to the amount you feel comfortable with paying for your mortgage. If you feel comfortable with paying a mortgage of $1800 for example this should be the minimal amount you are putting in your savings account for your purchase on a monthly basis.
Using an online mortgage calculator can give a great example of how much a monthly payment may be for a specific purchase price. Websites such as Smartasset.com and Nerdwallet.com; will let you play with multiple scenarios .
Let’s take a minute to look at Conventional lending and why this loan product may benefit your home purchase needs.
What is a Conventional
Conventional loan products are broken into two types of catagories; conforming and non-conforming loans. Conventional loans are not backed by a government agency.
Conventional loans are serviced by private mortgage lenders like banks, credit unions and other financial institutions and are offered by Fannie Mae and Freddie Mac.
Fannie Mae and Freddie Mac loans are referred to as conforming. Conforming conventional loans requires a score of 660 or higher and comes with lending limits regarding loan size.
For higher loan amounts a non conforming Jumbo loan should be considered. Nonconforming loans can come with a down payment requirement and higher interest rate. A credit score of 720 is ideal for a Jumbo loan financing but can be offered at 700 credit score with some lenders.
Conventional loans also included fixed-rate, adjustable-rate, low-down payment (HomeReady and Home Possibile), renovations (CHOICERenovation and HomeStyle)
Fixed rate conventional loans stay the same throughout the term of your loan. The Adjustable rate conventional loan also known as an ARM has an adjustable rate which fluctuates several times throughout the life of the loan. Your interest rate affects your monthly payment. A fixed rate will equal a fixed monthly dollar amount as an adjustable rate will mean your monthly payment amount will change periodically.
Fannie Mae’s HomeReady program is a product similar to FHA without mortgage insurance. HomeReady has a minimum credit score requirement of 620 , Loan to value maxim limit, income limits apply at 80% of the Area Median Income for the property location.
Freddie Mac Home Possible income requirement is 80% of the Area Median for the property location, borrowers minimum credit score of 640. Reduced Mortgage Insurance, and gift funds are eligible for the entire down payment.
Fannie Mae’s HomeStyle product assists with funds for energy, or water efficiency upgrades during renovations.
CHOICERenovation is a Freddie Mac product allowing borrowers to use loan proceeds to pay for renovations and is added to the Freddie Mac Home Possible or HomeOne mortgage loan. Transaction must be a purchase or a no cash-out refinance.
The difference between Conventional and Government Loans.
Government loans differ from Conventional loans based on borrower qualifications. Even though federally backed loans will accept lower credit scores as low as 580 and little down payment some federal loans have property restrictions and more documentation requirements.
Government backed loans are FHA Loans, VA Loans, USDA Loans.
FHA will require between 3.5% and 10% down depending on credit score. VA loans are backed by the U.S. Department of Veterans Affairs and designed for select members of the military members, their spouses and beneficiaries. The U.S Department of Agriculture offers USDA loans for low to moderate income homebuyers in eligible rural areas.
Benefits of Conventional Loans
Home buyers can see faster underwriting and less documentation requirements when looking to go conventional. Term limits are offered in a variety of sizes from 10, 15, 20, and 30 year fixed mortgages. Mortgage insurance is not required if the loan to value is under 80% and there is no limit to the number of conventional loans you can have at one time.
The current housing market can help increase the benefit of going with a conventional loan. We are seeing a sellers market in the state of Colorado and buyers are needing to show a lot more flexibility with the type of selling conditions that are coming with purchasing a home.
For example we have seen in 2020 and 2021 home sellers are selling their homes as is and asking to waive inspection and sometimes even an appraisal . A conventional loan can work with these requests as long as the buyer understands what they are waiving regarding the property purchase.
FHA requires an appraisal and will not lend on a home that may have safety issues and is in need of certain upgrades and fixtures.
The current selling market is also causing buyers to offer more than the appraised home value because of short supply. Conventional buyers normally have a down payment of 20% or more and are choosing cheaper homes so they can use some of their down payment as the over-bid amount of the appraised value.
In a sellers market like the one Colorado is experiencing, homeowners are looking to close on the sale of their home in 30 days or less. If a buyer is needing down payment assistance some of these programs require a minimum of 45-60 days to close on a home purchase.
Many home buyers may qualify for multiple types of lending programs. Knowing how to utilize a conventional loan will let you know if this is the best loan program for you.
During the qualification process if you are being offered a different type of loan program and feel you would rather go conventional you can take the provided information of this article to help you work towards conventional qualification when choosing not to go with a FHA, VA, USDA type of loan product.