CONVENTIONAL HOME LOANS
A Conventional Home Loan is a type of home loan that is not offered or secured by a government entity. Instead, conventional home loans are available through private lenders such as banks, credit unions, and mortgage companies, and may be guaranteed by two government-sponsored enterprises, Fannie Mae and Freddie Mac.
What is a Conventional Home Loan?
A conventional home loan is a home loan that is not offered or secured by a government entity. Instead, they are available through private lenders, such as banks, credit unions, and mortgage companies, and may be guaranteed by two government-sponsored enterprises, Fannie Mae and Freddie Mac. They typically have a fixed interest rate and are not guaranteed by the federal government, which means that they typically have stricter lending requirements.
Key Points of a Conventional Home Loan
- Not offered or secured by a government entity
- Available through private lenders and may be guaranteed by Fannie Mae and Freddie Mac
- Require an official mortgage application, required documents, credit history, and current credit score
- Typically have higher interest rates compared to government-backed mortgages such as FHA loans
- Have a fixed interest rate, which means the interest rate does not change throughout the life of the loan
Requirements and Documentation
To obtain a conventional home loan, potential borrowers need to complete an official mortgage application and provide the lender with necessary documents, including proof of income, assets, and employment status. The lender will also need to copy the borrower’s driver’s license or state ID card, Social Security number, and signature to pull their credit report.
- Proof of Income: Borrowers will need to provide thirty days of pay stubs, two years of federal tax returns, sixty days or a quarterly statement of all asset accounts, two years of W-2 statements, and proof of any additional income, such as alimony or bonuses.
- Assets: Borrowers will need to present bank statements and investment account statements to prove that they have the funds for the down payment and closing costs, as well as cash reserves. If the borrower receives money from a friend or relative to assist with the down payment, they will need gift letters to certify that these are not loans and have no required repayment.
- Employment Status Verification: Lenders want to make sure they are loaning only to borrowers with a stable work history, so they may call the borrower’s employer to verify their employment and salary. Self-employed borrowers will need to provide significant additional paperwork concerning their business and income.
Who May Qualify for a Conventional Home Loan?
People with established credit and a solid financial footing are typically ideal candidates for conventional home loans. To qualify, the borrower should have a credit score of at least 640 and a debt-to-income ratio of 36% or less. They should also have a down payment of at least 20% of the home’s purchase price readily available. Conventional home loans are often the best or only recourse for homebuyers who want the residence for investment purposes, as a second home, or who want to purchase a property priced over a certain amount.
Who May Not Qualify for A Conventional Home Loan?
- Those who have suffered bankruptcy or foreclosure within the past seven years
- Those with credit scores below 650
- DTIs (debt-to-income ratio) above 43%
- Less than 20% or even 10% of the home’s purchase price for a down payment
If you are turned down for a conventional home loan, be sure to ask the bank for the reasons in writing. Other options may be available, such as an FHA loan, which is specifically tailored for first-time homebuyers and has different qualifications and credit requirements, including a lower down payment.
Processing a Conventional Home Loan:
- Pre-Qualification: The first step in obtaining a conventional home loan is to get pre-qualified. This involves providing your lender with some basic information about your financial situation, such as your income, employment status, and debts. With this information, the lender can give you an estimate of how much you may be able to borrow and what your monthly payment might be.
- Application: Once you are pre-qualified, you can complete a formal mortgage application. The application will ask for more detailed information about your financial situation and will include a request for your credit report.
- Underwriting: After you have submitted your application, the lender will perform an underwriting process to determine whether you are eligible for a loan. This process involves reviewing your credit report, employment history, income, and other factors to assess your ability to repay the loan.
- Approval: If the underwriting process is successful, the lender will approve your loan. The approval process may take several days or even a few weeks, depending on the lender.
- Closing: Once you have been approved for a loan, the final step is to close on the loan. This involves signing the loan documents, paying any closing costs, and taking possession of the property.
It is important to note that a conventional home loan is a long-term commitment and should not be taken lightly. Before applying for a conventional home loan, it is important to carefully consider your financial situation, your long-term goals, and your ability to repay the loan.
Buying a home is a big decision and a conventional home loan is a powerful tool that can help make the process easier. It is important to note that a conventional home loan is a long-term commitment and should not be taken lightly.
Before applying for a conventional home loan, it is important to carefully consider your financial situation, your long-term goals, and your ability to repay the loan.
Let’s talk and find out where you stand!