What Conventional Loans Are
Buying a home is one of most important financial decision we have to make in our lives. In the direction of buying a home, our first step should be to arrange funds. In order to make a well-informed decision, it is important to meet up with mortgage expert who have in-depth knowledge of conventional loans.
A conventional home loan is not assured by a government organization, such as the Federal Housing Administration or the Department of Veterans Affairs. The qualifying criteria for a government-backed loan and a conventional loan aren’t much different, but conventional loans are likely to be harder to get and more stringent on qualifications.
Your lender will want you to provide your address history for the past two years, plus documentation to verify your identity. This ID can include a driver’s license or a Social Security card. You will also need to provide employment history and salary history, including pay stubs to verify your current income and tax returns to verify previous income. If you are self-employed, your lender may require additional information, such as tax returns or profit-and-loss statements. In any case, you must have the income you claim to have in order to purchase the home.
Your monthly mortgage payment and monthly debt loads must fall within certain percentages, in relation to your gross monthly income, in order to qualify for a conventional home loan. Your monthly mortgage payment, including taxes, insurance and other fees, cannot exceed 28 percent of your gross monthly income. Your monthly mortgage payment, when combined with your other monthly debt payments such as car loan, student loans and credit cards, cannot exceed 36 percent of your gross monthly income.
Most conventional loans conform to guidelines set by two of the largest financial institutions in the U.S., Fannie Mae and Freddie Mac. Both entities purchase loans from other financial groups, and if the loans don’t conform to Fannie Mae or Freddie Mac rules, they cannot be purchased. Your credit score is a major part of the equation when qualifying for a conventional mortgage. Fannie Mae requires that the borrower have a credit score of at least 580. If your score is lower than 580, you may find it difficult to get a conventional home loan.
The standard down payment for a conventional loan is 20 percent of the cost of the home. If you are unable to put down this amount, there are many ways around the requirement. One is purchasing mortgage insurance, which is tacked onto your monthly payment until the amount you owe on the home is less than 80 percent. Another is to choose a loan program that requires a smaller down payment or no down payment at all. You will probably have to have a great credit score to qualify for such a loan. But putting down a sizable down payment is the best way to create equity in your home.
- 30-year term with 97% LTV – 3% Down payment, 660 score
- 30-year term with 95% LTV – 5% Down payment, 620 score
- 30-year term with 90% LTV – 10% Down payment, 620 score
- 30-year term with 85% LTV – 15% Down payment, 620 score
- 30-year term with 80% LTV – 20% Down payment, 620 score
Conventional Conforming loans get loan limits of $0-$417,000
High Balance loans from $417,001-$625,500
Jumbo loan limits of $625,500-$5 Million.
Modifiable Conventional Loans
Modifiable or adjustable conventional loans mean that the loan can be adjusted. Rates which are fixed for some period of time can be turned into adjustable-rate loans. There are some important kinds of Modifiable conventional loans which include:
- 1 / 1 ARM loan is fixed for 1 year and adjusts for the remaining 29 years.
- 3 / 1 ARM loan is fixed for 3 years and adjusts for the remaining 27 years.
- 5 / 1 ARM loan is fixed for 5 years and adjusts for the remaining 25 years.
- 7 / 1 ARM loan is fixed for 7 years and adjusts for the remaining 23 years.
- 10 / 1 ARM loan is fixed for 10 years and adjusts for the remaining 20 years.