If you’re preparing to buy a house, you’ll likely consider a conventional purchase loan. Afterall, it’s the most popular option among homebuyers.
Those who meet the qualification requirements for conventional loans often get flexible home financing that makes owning a home affordable.
What is a Conventional Purchase Loan?
You have a handful of options when choosing the right loan to buy a home. These loan types often differ based on their qualification requirements and the terms they offer, such as the loan’s length, interest rate, and minimum down payment amount.
Conventional purchase loans are part of the standardized mortgage options established by government-sponsored Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation). For this reason, conventional qualification requirements are based on standardized borrower criteria.
Simply put, if you have a higher credit score, a conventional purchase loan is a great choice for financing your home. It opens up options for your down payment amount, closing costs, and monthly payments. With a lower credit score though, you may need to meet higher minimum requirements to qualify for these benefits.
Other common loan programs like FHA or VA loans differ in that they’re insured by the government. They allow for more flexible qualification rules, which may also come with less customizable loan terms.
How can we help?
How to Get a Conventional Loan
If you’d like to see whether you qualify for a conventional loan, connect with us. To get you started, we’ve outlined the steps and documentation needed to help you understand the process.
The Financing Process
Homebuyers often start by requesting a quote for their interest rate or beginning an application with a lender. By sharing basic information about your potential purchase, we’ll work with you to pull your credit report and discuss your finances, as well the potential value of the house you’re interested in purchasing.
As we move through the process we’ll arrange for an appraisal of the house to determine its value. We’ll also discuss the terms you qualify for and your options, as well as request various documentation for the underwriting process to make sure the loan begins on a solid foundation.
We’re with you through each step, leading to closing where we’ll finalize your affordable loan when you’re ready to purchase.
Conventional Loan Requirements to Meet
These are some of the common requirements often needed to qualify for a conventional purchase loan. If you have questions about these requirements, we’re here to help.
- In most cases it’s best to have a credit score of 620 or higher. With higher credit scores often comes better interest rates.
- Through underwriting evaluation, you’ll need documentation of consistent income with a Debt-to-Income ratio at or below 50%. This ratio shows how much of your monthly income goes to paying your debt.
- Along with income information you need to share employment verification and history.
- First-time homebuyers need a down payment of 3% or more. This minimum requirement goes up based on your income, if it’s a second home purchase, and other factors.
- A down payment less than 20% requires paying Private Mortgage Insurance (PMI) premiums until you’ve paid 20% equity into the home, meaning you reach a Loan-to-Value ratio of 80%.
Conventional Loan FAQs
Financing a home is an important investment. It’s ok to have questions. We’ve compiled answers to the frequently asked ones, but don’t hesitate to ask more.
Both conventional and FHA loans offer flexible financing options. However a conventional loan often has stricter qualification requirements. The benefit, if you qualify, is that you also get better options when it comes to your mortgage insurance, term lengths, and closing costs, as well as a lower interest rate.
FHA loans differ in that they’re insured by the government, so lenders don’t need you to meet the same strict requirements. If you have a lower credit score, an FHA loan may be the most affordable loan for you. Although it may provide fewer options than a conventional loan, it does provide competitive interest rates and low down payment options.
You’ll want to consider how much you’ve been able to save for a down payment, the value of the house you want to buy, as well as how the down payment amount impacts your potential mortgage.
Typical required down payment amounts for conventional loans range from 3% of the value of the house for first-time homebuyers, up to the recommended 20% to eliminate Private Mortgage Insurance (PMI) premiums. Depending on your current finances and your homebuying situation, various factors are considered to determine your minimum down payment amount.
Private Mortgage Insurance or PMI is an insurance premium that protects the lender’s investment in your home purchase. Once you own 20% equity in your home, it’s no longer required. So with a down payment of 20%, you can eliminate paying PMI altogether. This option, and the fact that you can stop paying PMI once you reach a Loan-to-Value ratio of 80% is one of the unique advantages of a conventional loan.
FHA loans on the other hand, require that mortgage insurance is paid over the entire length of the loan or many years into paying your loan.
Loan limits align with the other standards set for conventional loans. The limits for a conventional loan require that the house you’re purchasing fits within the range of a designated value. If it goes above or below these limits, you may need to seek other financing options.
Loan limit requirements also differ in certain states and high-cost locations. They’re set each year by Fannie Mae and Freddie Mac, and the current minimum limit is upwards of $600,000.
When you close your conventional loan to purchase a house, you’ll need to account for several costs, both upfront and those included in your ongoing monthly payment. These will be clearly outlined as your loan is processed and before you close.
Beyond your initial down payment, you’ll also pay closing costs, which cover expenses such as loan origination fees, an appraisal, title insurance, etc. These typically range from 2-4% of your total loan amount.