At NEXA Mortgage, it’s our top priority to serve clients with the resources they need to ensure they’re able to get the home that they want. Fueled by years of industry knowledge combined with sophisticated expertise, we pride ourselves on acting as a leading resource for clients looking to explore which loan option best suits their needs.
Conventional Home Loan
Often compared with an FHA loan, a Conventional Home loan is one offered to home buyers that’s not typically associated with the federal government. Rather, they can be secured by working with a financial establishment or through a private lender. Keep in mind that there do exist, what are called, conforming loans that adhere to requirements instituted through government agencies. These two entities includ
• The Federal National Mortgage Association (Fannie Mae) • The Federal Home Loan Mortgage Corporation (Freddie Mac)
As you continue along your journey to securing your home, you may hear these two entities referred to by their abbreviations, Fannie Mae and Freddie Mac.
Who Best Qualifies for a Conventional Home Loan?
As compared to an FHA loan, conventional home lending programs operate under more restrictive guidelines, but still offer enough flexibility for first time home buyers. Veteran homeowners, first time buyers and applicants with strong credit and finance history are all suitable candidates for a conventional home loan.
Credit Score
Conventional home loans are a great option for home buyers with a strong credit score, lower debt-to-income ratio and who are looking to put more money towards their down payment. If you have a credit score of 700 or above, then you shouldn’t have any issue getting approved for a loan with favorable terms that benefit you financially.
The minimum credit score required to be considered for a conventional home loan begins at 620. However, keep in mind that unlike FHA loan programs, your credit does have an impact on the rate you’ll be offered upon approval. Those applying with a credit score in the range of anywhere from 620-699 could qualify, but under terms that aren’t as advantageous to your overall financial health.
Should this be the case, we’re more than happy to discuss alternative options that are more favorable to your respective circumstances!
Debt-to-Income Ratio (DTI)
When evaluating your application, another factor that will be considered is your total monthly income and the total cost of your monthly obligations. This will help to determine if the funds in your account, after all bills have been paid, leave enough room for you to comfortably make your mortgage payments.
In line with the conventional home loan’s more restrictive guidelines, applicants with a lower debt-to-income ratio have a greater likelihood of qualifying for one of these programs.
A conventional home loan will typically set a cap on the required debt-to-income ratio that rarely exceeds 49%; whereas an FHA program might allow it to reach 56%.
What other factors are considered when applying for a Conventional Home Loan?
There’s an increased emphasis on the quality of homeowners financing through conventional home loan programs. In addition to considering your credit history and debt-to-income ratio, they’ll also evaluate your risk as a borrower by taking into account:
Employment
Your employment history plays a crucial role in whether or not you qualify for a conventional home loan. Factors considered include:
• History of consistent income • Patterns of increasing income • If there are gaps in employment. If so, explain
Assets and Bank Account
• Assets • How much money you have in your bank account • Typically, they’ll require 2 months of bank statements
Costs Associated with a Conventional Home Loan
A conventional loan operates under guidelines that are tighter than those associated with the FHA. However, their programs still offer enough flexibility that benefits first time home buyers and other qualifying candidates.
How much money do I have to put down?
The required down payment for a conventional home loan varies. Typically, you should expect to put down 5% upfront; however, there are allowances that can help you get that percentage to 3% if you qualify.
How can I get my down payment to 3%?
There are two ways that you can reduce that one-time upfront payment:
• You or another person included on the loan is a first-time home buyer. If this isn’t your first time buying a home, you can still qualify for that 3% allowance if you bring someone else on the loan who hasn’t previously purchased a home.
• You can try to qualify for programs like Home Possible and HomeReady, but you must meet the required income threshold which was recently lowered by Fannie Mae and Freddie Mac
Do I have to pay for mortgage insurance?
Similar to FHA home loans, conventional loan programs also require a home buyer to pay for mortgage insurance. This is a way for the lender to protect themselves against any financial losses should a buyer default on their payments or foreclose on their home.
Anyone putting less than 20% towards their down payment is subject to pay a mortgage insurance premium each month. Once you reach 20% in equity on your home, you no longer have to pay the MI cost!
How much does the mortgage insurance cost each month?
Evaluating terms under a conventional loan is essentially risk based. So, when financing through one of these programs, the MI is determined by your risk level. Using your credit score as a determining factor, the higher the score, the less your monthly MI payment. Appraisal Requirements
The appraisal guidelines under conventional loans are relatively lenient when compared to other programs. While health and safety measures are still taken into account, unsatisfactory properties won’t be completely restricted like they would be if financing through FHA. As long as its habitable, home buyers have permission to purchase a foreclosure or fixer-upper assuming it isn’t completely irreparable.
Reasons Why Conventional Home Loans May Not be Appropriate
There are a few reasons why you may want to consider financing your mortgage through a program other than a conventional loan. However, don’t get discouraged because there are plenty of other options that we’re going to explore to find the one that best suits you.
Those rebuilding their credit or who have an inconsistent finance history may want to consider another option as these loan programs aren’t as flexible when assessing whether or not a home buyer’s history meets the necessary criteria.
Poor Credit History
If you’re in the process of rebuilding your credit, then a conventional loan may not be your best option. Other factors on your credit report that may be detrimental to your chances of qualifying for a conventional loan include:
• Previously filed for bankruptcy • Foreclosure • Missed Credit Card Payments • Collections Agencies • And any other factors that have negatively impacted your credit score
Higher Debt-to-Income Ratio
• The debt-to-income ratio for qualifying home buyers rarely exceeds 49%
Is a Conventional Home Loan for You?
For qualifying home buyers, a conventional home loan is a great option that affords you requirement flexibility while also offering you the potential to save money compared to other options. Whether you’re interested in applying for one, or simply want to learn more, we’re here to provide you with the information, so that you can get the home you want.
Contact us to talk with one of our dedicated agents who’s ready to help you take the first step to making your dream a reality
3100 W Ray Rd
Ste 201 Office #209
Chandler, AZ 85226
Earnest Noblett
NMLS #1766436
Corporate Office:
NMLS#: 1660690
AZMB – 0944059
Licensed In: FL, OK & TX
www.nmlsconsumeraccess.org
