Conventional Loans are ones of the best way to find a solution when it is hard enough to buy a home. However, conventional loans are provided by the private sector instead of the government.
Conventional loans can be processed through the mortgage lenders like credit unions, banks or online lenders.
In comparison, the loans guaranteed by the government will be backed by the government institution like FHA loans and USDA loans.
Today, we focus on reviewing conventional loans particularly understanding the types and the requirements to apply for conventional loans. So, continue reading our article below and take the benefits of it.
Types Of Conventional Loans
There are two primary types of conventional loans. They are the fixed-rate and adjustable-rate. A fixed rate mortgage has a fixed interest rate. It will never change.
In contrast, an adjustable-rate mortgage has changeable interest rate based on the time-rules like yearly, monthly, per six months and etc.
Here are the common types of conventional loans provided to help people buy their homes:
- Conforming Loans
Conforming loans can be applied through the secondary mortgage market. The lenders derive the fund by selling the mortgage to Fannie Mae and Freddye Mac, the two government-sponsored enterprises (GSEs).
This means that conventional loans are provided by private lenders by the government sponsorship. In fact, it is not guaranteed by the government.
- Jumbo Loans
Jumbo loans are also called non-conforming loans. Fannie or Freddie cannot buy these loans. However, Jumbo Loans are still available for the borrowers who are eligible through the conventional loan option. The rates of these loans are usually higher than that of the smaller mortgage.
- Non-Qualified Mortgage
Non-qualified mortgage is the third type of conventional loan. It cannot be sold to Fannie or Freddy either. However, the options are available for people who can afford a mortgage without the ability to meet the requirements of DTI or credit.
Non-qualified Mortgage can be a form of a portfolio loan. This type of conventional loan keeps its mortgage on its book instead of selling it to Fannie or Freddie. One thing to remember about non-qualified mortgage is the rates which are higher that that of the other type of loan.
Requirements of Conventional Loans
Conventional loans are managed by the lenders, therefore, the requirements are also set by the lenders. In this case, the requirements include the credit score, debt level, income and more. Compared tp the other loans, conventional loans have stricter requirements.
- Credit Score
Credit score is the first primary requirement demanded by most types of loans. Generally, a loan application requires minimum credit score of 620. In this regard, you need a higher credit score around 740 or higher in order to get the lowest interest rate and the best deal.
- Debt-to-income (DTI) Ratio
Debt-to-income (DTI) ratio is the important factor to determine whether you are eligible for the loan or not. DTI helps you how much to pay each month like the credit card debt, student loan, auto loan and etc. This way, conventional loan requires the candidate to have 43% of DTI.
- Down Payment
Conventional loan doesn’t provide a 100% of home purchase price unless you are able to make a down payment. In this regard, conventional loan allows for a down payment about 3% to 5%.
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For example, if you take 3% of down payment to buy a home with $350,000 price, you’ll need to put minimally $10,500. Or, if you find it hard to deal with the down payment, you can ask for down payment assistance.
- Private Mortgage Insurance
Other requirement to be eligible for conventional loan is the private mortgage insurance. This way, if you cannot pay 20% of down payment, the private mortgage insurance will protect the lenders by both increasing the home’s value and paying down the mortgage.
- Loan Size
The last step which can be your final move to get the conventional loan is deciding on how much money you want to borrow. In most loans, there are always limitation on how much money to loan. The limitation can change from year to year depending on the property location. In 2023, the U.S limitation over conventional loans is $1,089,300. If you need a larger amount of loan, you can probably switch to Jumbo Loan.
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Now you have learnt all about conventional loans including the types and the requirements on how to apply for the loan. Keep in mind that this loan is not guaranteed by the government but it is sponsored by the government.
Like many other types of loan, you must meet the requirements to apply for the loan. The requirements are almost the same with the other loans. Those include the credit score, DTI ration, down payment, private mortgage insurance and the loan size.