What's A Conventional Loan?

What's A Conventional Loan?

Author: David Armenta

Date: 5-6-2023

A conventional loan is a type of mortgage that is not guaranteed or insured by the government, unlike FHA loans or VA loans. Instead, conventional loans are backed by private lenders and institutions, and they conform to the guidelines set by Fannie Mae and Freddie Mac, two government-sponsored entities that buy and sell mortgages on the secondary market.

There are two main types of conventional loans:

  1. Conforming Loans: These are conventional loans that adhere to the loan limits set by Fannie Mae and Freddie Mac. In most parts of the United States, the loan limit for a single-family home is $548,250 (as of 2021). However, in certain high-cost areas, the loan limit can go up to $822,375.

  2. Non-conforming Loans: These are conventional loans that do not conform to the loan limits set by Fannie Mae and Freddie Mac. They are often referred to as jumbo loans, and they are used to finance more expensive properties that exceed the conforming loan limits. Because they are considered higher risk, jumbo loans often have stricter requirements for credit score, income, and down payment.

 

HOW TO QUALIFY FOR A CONVENTIONAL

 

To qualify for a conventional loan, a borrower typically needs to meet certain requirements related to credit, income, and down payment. Here are some common qualifications:

  1. Credit score: Lenders usually require a minimum credit score of 620 for conventional loans, although a higher credit score may be needed to qualify for a better interest rate. A borrower's credit history, including payment history, outstanding debts, and credit utilization, will also be evaluated.

  2. Income: Borrowers must demonstrate that they have a stable income and can afford to repay the loan. Lenders typically look at a borrower's debt-to-income ratio, which is the percentage of monthly income that goes towards paying debts. The maximum debt-to-income ratio for a conventional loan is usually around 45%.

  3. Down payment: Conventional loans typically require a down payment of at least 3% of the purchase price, although a higher down payment may be required to qualify for a better interest rate or to avoid private mortgage insurance (PMI).

  4. Property appraisal: The property being purchased must be appraised by a licensed appraiser to ensure that its value is sufficient to secure the loan.

  5. Other requirements: Borrowers may need to provide documentation of their employment history, assets, and other financial information, as well as meet other lender-specific requirements.

It's important to note that lenders may have different requirements and guidelines for conventional loans, so it's a good idea to shop around and compare offers from multiple lenders before choosing a loan.

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