People usually opt for conventional loans because they provide great rates, lower costs and an increased home buying flexibility. More than 60% of all mortgage applicants prefer this loan option. Conventional loans are conforming loans, since they are regulated by a set of standards established by two government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. A homebuyer who wants to get access to a conditional loan must meet the following requirements:
1. Down Payment. The standard down payment for a conventional loan ranges between 5% to 25% of a home's value, depending on the borrower's credit and financial condition but it is typically 20%. For example, a $200,000 home would require a $50,000 down payment at 25%, but, depending on a lender's conditions, a borrower may be able to put down as little as 5% at closing. Still, you should keep in mind that this option is usually offered to those with exceptional credit and financial profiles.
2. Income. To be eligible for a conventional loan, your monthly mortgage payments and monthly non-mortgage debts must fall below certain limits. For example, a lender may require your monthly mortgage payments (which may include taxes and insurance) not to exceed 30% of your gross monthly income. Furthermore, your monthly mortgage payments, when combined with your other monthly debt payments, may be limited to a maximum of 36% of your gross monthly income.
3. Credit Score. Your credit score also plays an important role when qualifying for a conventional loan. Most lenders require a minimum FICO credit score of around 620 to obtain approval. Furthermore, if you plan on making a down payment of less than 20%, you may need a FICO credit score greater than 700.
A conventional loan provides the following benefits:
Processing a conventional loan is more streamlined and faster, because the borrower deals directly with the lender and doesn’t have to wait for government approvals. This means that conventional loan applications typically have shorter and less complicated approval processes.
In many cases you can avoid Mortgage Insurance Premiums(MIP) with conventional loans than with government insured loans. This happens because conventional loans require higher down payments. Still, even with conventional loans, some lenders may ask insurance premiums, depending on your financial profile, the net worth of the home and other related factors. However, private mortgage insurance can often be obtained at a lower cost than with government-insured loans.
Conventional loans are offered through private lenders and the fees are not set by the government. This means the fees can vary widely among lenders. This means that if you do some comparison shop, you can save a lot of money.
Before applying for a conventional loan, make sure to speak with at least a few mortgage professionals. Remember, each lender offers different rates, terms and fees, so it's best to receive an estimate prior to making any decision.