Loan Types
Conventional Loan
A conventional loan is a type of loan that is not offered from a government entity. Instead, conventional loans are offered through private lenders such as banks, mortgage companies and credit unions. A typical conventional mortgage has a fixed rate of interest, which means that the interest rate stays the same throughout the life of the loan. Since conventional mortgages are not guaranteed by the federal government, they typically have stricter lending requirements.
To qualify for a conventional loan, a borrower must complete an official mortgage application with their lender, supply the lender with documents necessary to perform an extensive check on their credit history, current credit score, debt to income ratio, and the loan to value ratio of the subject property.
During the mortgage process, the lender will assess your liabilities and assets to make sure you can afford the monthly mortgage payments. The preferred threshold is this mortgage should not exceed 28% of your gross income, and your total debt-to-income shouldn’t exceed 45% of your gross income in most circumstances. This is where your Loan Officer can help you understand the guidelines and what you qualify for based on you your unique circumstances.
Lenders must also make sure that the borrower can make a down payment on the property they are looking to finance (and if so, how much), along with other up-front costs, such as underwriting costs or loan origination fees, closing costs, broker fees; all of which can increase the cost of a mortgage.
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The amount of down payment that the home buyer must put down depends on the own personal situation and the type of loan they are getting. For first-time home buyers, it is possible to put as little as 3% down under certain loan programs. If you are buying a home that is not a single-family residence, you need a down payment of at least 15%.
For a second home, the borrower will be required to put down a down payment of at least 10%, often 20-25% is required. If you are getting an adjustable rate mortgage, the down payment requirement is 5%. Since jumbo loans carry more risk to creditors, the down payment requirement could be anywhere from 20% to 40%.
There multiple factors that influence the interest rate of a conventional loan. The most important of these factors are the terms of your loan, such as the size and length of your loan, whether you get a fixed or adjustable rate, as well as the current economic and financial conditions of the housing market. Mortgage lenders set the interest rates based on their expectations of inflation in the future, as well as the supply and demand of mortgage backed securities. There multiple factors that influence the interest rate of a conventional loan. The most important of these factors are the terms of your loan, such as the size and length of your loan, whether you get a fixed or adjustable rate, as well as the current economic and financial conditions of the housing market. Mortgage lenders set the interest rates based on their expectations of inflation in the future, as well as the supply and demand of mortgage backed securities.
There is no single set of requirements to qualify for a conventional loan, however, since they are not backed by a government entity, they have more strict requirements than other loan programs such as an FHA loan. Therefore, not everyone qualifies for a conventional loan. 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, have a credit score below 650, debt to income ratios above 43%, and in some cases a down payment less than 20% or even 10% of the home’s purchase price.