Feb. 6, 2019
The decision to buy a home seems incredibly overwhelming at first! There are so many parts and pieces in the process to become a homeowner.
Don’t let it get you down, though. Take a deep breath and start at the beginning. The first step is taking the time to get pre-approved for a loan. Pre-approval is important because it will let you know what types of homes match your mortgage and the price range you’re working with. Pre-approval will save you time, money, and stress as you start your home search.
Qualifying for a loan depends on several factors. Lenders will look through your credit history, proof of employment and assets, and examine your debt to income ratio. There are lots of affordable financing options available for almost every budget and situation.
Today, we’re going to talk about the specifics of Conventional Loans.
What is a Conventional Mortgage?
Conventional mortgages are not insured or guaranteed by the government through institutions like the FHA (Federal Housing Administration), VA (Veteran's Administration), or USDA (United States Department of Agriculture). They have strict requirements but also allow borrowers to finance the widest range of property types.
These mortgages are offered by private entities like banks, credit unions, and mortgage companies or government-sponsored enterprises like Fannie Mae and Freddie Mac.
Because conventional loans don’t come with any kind of government assurance in the event of borrower default, they are a higher risk investment for lenders. This can translate to higher interest rates and much stricter qualifying criteria.
Borrowers looking to take out a conventional loan will need to have cash for a down payment, good credit, and meet the debt to income ratio requirements. A 620 credit score will allow you to qualify, but a 740 or greater will help you get a good rate. The preferred debt-to-income ratio sits at 36% and cannot exceed 43%. This ratio includes all your current debts and payments, such as car notes, credit cards, and student loans.
Many people are under the impression that conventional loans are the same as conforming loans, but this is not the case. Conforming loans are simply financial instruments that meet criteria established by Fannie Mae and Freddie Mac, allowing them to be resold on the secondary market. Conventional loans typically meet these standards, but this is not always the case.
Conventional Mortgage Fundamentals
Fixed vs Variable Rates
Interest rates depend on the terms of the loan, including the length of the loan and amount being borrowed. Your credit and employment history will also be considered when calculating interest rates.
Fixed rate mortgages are set, established rates for the life of the loan. Your monthly payment amount will remain the same for the term of your loan.
Variable rate mortgages have fluctuating rates that depend on various market factors. The rate changes can affect your monthly payments, but they do have annual and lifetime caps on how high the rates can go.
Discount points are fees paid upfront to the lender in exchange for a reduced interest rate. One point is equal to 1% of the loan value and usually takes about a quarter of a percent off the interest rate.
Term Lengths & Loan Limits
Conventional loans can range in term length from 10 to 30 years. 15 and 30-year notes are the most common arrangements. A shorter term length will mean larger monthly payments, but will also save you a bundle on interest fees.
The current maximum loan limit for a single-family residence is $417,000. There are exceptions for areas with a higher cost of living that allow borrowers to finance up to $625,000.
Conventional loans require a substantial down payment. Most lenders require a 20% down payment, but some will allow amounts as low as 3%. If your down payment is less than 20%, you will be required to purchase private mortgage insurance.
Private mortgage insurance is a risk-based insurance that insulates the lender in the event of default. The better your credit and financial history, the lower your premiums will be.
A larger down payment translates to smaller monthly payments, helping make your financing more affordable in the long run.
Qualifying for a Conventional Mortgage
Proof of Income
You will need to provide at least one month of pay stubs showing monthly and year-to-date income, as well as two years of tax returns (if you own rental properties or have other non-salary income) and two years of W-2 statements.
In order to prove your financial stability, you’ll need to furnish at least three months of bank statements for checking, savings, and investment accounts.
For conventional loans, you’ll be asked to provide proof of cash for down payment. If the down payment is a gift, you’ll need a gift letters certifying that the money is yours free and clear, and not a loan.
The lender will contact your current employer to verify your employment history and salary. If you have recently changed jobs, they might also contact your previous employers to verify the length of time you worked there and your salary.
Proof of Identity
You will need to provide a current driver’s license and your Social Security card to confirm your identity and authorize your lender to check your credit history.
Duck Brothers Real Estate
We are in the business of building relationships and giving our friends the best possible experience. We can help you find a reputable mortgage lender and guide you through the approval process with confidence.
Are you ready to reach your American Dream? Call 254-613-6326 or click www.duckbrothersrealestate.com to speak with a licensed Realtor.
Our experienced agents will make your home-buying experience convenient and stress-free! Our goal is to get you in your dream home as soon as possible! Let’s start today.
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