Conventional mortgages adhere to underwriting guidelines set by mortgage financing giants Fannie Mae and Freddie Mac. They’re the best value mortgage loan for many would-be homebuyers.
Conventional loans often offer lower interest rates than their government-insured counterparts if you have good credit, a steady income, and can afford the down payment. They can also be easier and faster to close than their government-backed counterparts.
FHA vs. Conventional Mortgages
FHA loans require that a property meet strict eligibility guidelines as far as price, location, and habitability, but conventional lenders aren’t bound by these same bureaucratic regulations.
FHA loans might require a lesser down payment, but the higher down payment required by some conventional loans can help you build equity more quickly, and avoid private mortgage insurance in some cases.
FHA loans have less stringent credit score requirements. You might qualify with a score as low as 500 to 580 depending on some additional factors, and you most likely won’t be hit with additional fees or higher rates because your credit score is less than average.
Conventional loans are a higher risk for lenders because of the lack of government insurance, so you must often meet stricter credit and income requirements than you would if you financed through an FHA or VA mortgage.
Lenders can often process conventional mortgages more quickly than government-insured mortgages.
Conventional mortgages are available from pretty much every bank and lender in the nation, so you can shop your rate quite a bit. Not all lenders offer FHA products, so you could be limited in this respect.
Conventional loans can be used to finance just about any type of property, whereas some condo complexes and certain houses aren’t approved for FHA financing.
Base Underwriting Guidelines
The guidelines stack up on top of each other as you progress on the risk spectrum from primary residence to investment property. The base underwriting guidelines for Fannie Mae and Freddie Mac are established. In general, they require that all borrowers meet certain credit scores, income requirements, work history, debt to income ratios, and minimum down payments.
A few of the items that a lender will look at when considering financing include:
- Your total monthly expenses
- Your total gross income per month
- Your employment history
- Your credit score and payment history
- Your assets, including checking, savings, and retirement accounts
A common misconception about conventional refinancing is that you must make a 20% down payment in order to qualify. The reality is that conventional financing allows you to refinance with as little as 5% down in combination with maintaining private mortgage insurance (PMI) until 20% equity is achieved. And PMI rates can be lower for conventional loans than with FHA loans.
Conventional Loan Specifics
The Conventional Purchase program is a great option when you’re looking to purchase a new home as a primary residence, a second home, or an investment property.
All three occupancy types come with a slightly different set of rules and guidelines on how they should be documented.
The program has very competitive pricing compared to some others that are available. This can make a big difference in your monthly mortgage payment and even the interest you’ll pay over the life of the loan.
Conventional loans include both conforming and non-conforming loans. You can get pretty much anything from a 1-month ARM to a 30-year fixed, and everything in between. Many conventional mortgages require that you repay the full loan amount at a fixed interest rate over a 30-year period, but you can also opt for an adjustable-rate mortgage where the interest rate is tied to the current market rate.
A borrower with an adjustable rate mortgage can expect his interest rate to fluctuate periodically, although usually not until three to seven years into the loan and the rate during this early period is typically quite low.
What Are the Typical Qualification Requirements?
Your mortgage professional might require additional information after personally reviewing your application, but some basic requirements for commercial loans include:
- A minimum credit score 640 as of 2019, although 620 is permissible in some circumstances and somewhere in the neighborhood of 720 is even better
- Total debt to income ratio from 36% up to 43% for those with excellent credit or who put down sizable down payments
- Housing debt to income ratio under 35%
- No recent major derogatory credit factors, such as bankruptcy, repossession, foreclosure, or a short sale
- Your down payment funds should come from an allowed, documented asset source
- Verifiable income through W-2 forms and tax returns, typically 2 years’ worth with exceptions for recent graduates and other major life events
- Loan amounts are limited to no more than $424,100 as of 2019, or $625,500 in certain high-cost areas of the country
Make Sure You Have All the Facts
Your mortgage professional should clearly explain the pros and cons between conventional mortgage loans and those offered by the Federal Housing Administration (FHA), the Veterans Administration (VA), and the U.S. Department of Agriculture (USDA). If not, you’ll want to ask.