If you’re ready to move forward with buying a house, you first need to determine what kind of mortgage loan you qualify for. Suppose you are eligible for a conventional loan. You may have questions about what you’ll have to put down as your down payment. If you have heard a lot about conventional loans but are unsure whether they will be the right fit for you, we have you covered.
Here’s everything you need to know about conventional loans:
What is a Conventional Loan?
Let’s start with the basics. What exactly is a conventional loan?
A conventional loan is a type of mortgage that conforms to the standards and requirements put forth by Freddie Mac or Fannie Mae, which are primarily used for mortgage financing purposes. Essentially, these companies will buy mortgages from lenders and then sell them to investors, making it easier for qualified buyers to purchase a home.
Since these loans conform to these standards, you may also hear conventional loans referred to as conforming loans. However, you may also obtain a conventional loan that is “non-conforming.” There are no set standards or requirements outlined in a non-conforming loan.
What’s Required for a Conventional Loan?
If you’re looking into securing a conventional loan for your new home, homebuyers must meet a few requirements first. First and foremost, conventional loan recipients must be able to put a down payment on their new home.
Most first-time homebuyers can get away with putting down as little as 3% of the home’s value. However, this will depend on the circumstances.
For example, individuals buying their second or third home or who make no more than 80% of the local median income must put down 5% as a down payment. Five percent is also required if you get an adjustable-rate mortgage with a conventional loan. Furthermore, individuals buying more than one home with a conventional loan will have to put down as much as 15%.
There are other requirements you must adhere to as well, such as:
- A minimum credit score of 620: To qualify for a conventional loan, you’ll need a minimum credit score of 620 or a “fair” credit score. A fair credit score is usually anything between 580 and 669, so mortgage lenders prefer that you’re comfortably in the middle of this range. If you don’t have a 620 credit score, you might not qualify for this type of loan. But don’t worry just yet – there are steps you can take to raise your credit score (more on that later).
- Size of your loan: Since some conventional loans have to conform to Fannie Mae or Freddie Mac, your loan must not exceed its limits. In 2022, conforming loans must not exceed $647,200 for single-family homes, except in high-cost areas like Hawaii and New York.
- Your debt-to-income ratio: Ideally, your debt-to-income ratio shouldn’t exceed 50 percent to qualify for a conventional loan. However, the lower you can get your debts, the better outcome you’ll have.
Private Mortgage Insurance is Required
Those obtaining a conventional loan and putting down less than 20% as a down payment will be required to get private mortgage insurance (PMI).
Private mortgage insurance is designed to protect your mortgage investor/lender if you default on your loan. Unfortunately, there is no set price across the board regarding PMI. Instead, the rate will depend on your credit score, how much money you put in a down payment, and the type of loan you’re getting.
Homeowners have multiple options for paying for their private mortgage insurance. They can pay it as part of their monthly mortgage payment, or as part of a higher interest rate. In some cases, homeowners may be able to pay their insurance fees as part of their closing costs. How you’ll pay will depend on your situation.
Will I Have to Pay for PMI Forever?
No. You’ll only be required to pay for PMI until your home reaches 20% equity (or in other words, 20% of your home’s worth). In layman’s terms, this simply refers to the difference between what your home is worth and how much you owe on your mortgage.
Generally speaking, it takes about five years for a home to increase in value. Unsurprisingly, your payments for private mortgage insurance will usually taper out around 5-7 years after you first purchased your home.
How to Raise Your Credit Score to Qualify for Conventional Loans
There are several ways you can increase your credit score. First, try and pay off your smallest debts first. And if you can, try to make more than the minimum payment due on your credit cards or bank loans.
It’s also a good idea to see where you can make cuts. Whether you cancel unnecessary subscriptions or order take-out less, there are many easy ways to raise your credit score to increase your chances of obtaining a conventional loan.
Do You Want to See if You Qualify for Conventional Loans? Call City Creek Mortgage Today to Learn More!
When you’re ready to buy a house, it can be overwhelming to figure out all of the options available to you. Fortunately, the team at City Creek Mortgage is here to help!
We have years of experience working with both seasoned and first-time homebuyers alike. We’re also familiar with the requirements for obtaining a conventional loan throughout the United States. This includes Utah, Oregon, Colorado, Idaho, Illinois, Kansas, Florida, and California.
Homebuying should be a fun, seamless experience – and we’ll keep it that way! Whether you have questions about eligibility or haven’t found the right mortgage lender yet, turning to City Creek Mortgage can take the weight off your shoulders. Call us today at 801-501-7950 to get started. The sooner you call us, the sooner you can be living in your dream home.
We look forward to connecting with you soon!