Conventional Home Loans

Conventional mortgages are different from other loan types such as FHA, VA, and USDA loans, which are loans backed and insured by the government.  You could look at a conventional loan as the most basic and standard conforming loan.  These loans are usually best for someone who has good or excellent credit.

Advantages of Conventional Loans

Below are some advantages that conventional loans offer:

• Down payments as low as 3% – Some conventional loan programs allow down payments as low as 3%.
• Single payment mortgage insurance –  You have the option to pay all of your monthly mortgage insurance in one lump payment.  This is not to be mistaken to Upfront Mortgage Insurance Premiums (UPMIP) which are applicable to FHA loans.  How single payment mortgage insurance works is you can pay all of your monthly PMI payments in one payment.  This can save you money a lot of money since if you decide to pay it all upfront, it is only 1.75% of the loan amount, and then no future
• No upfront mortgage insurance – This is not to be mistaken as the above option of paying your monthly insurance as a single payment upfront.  FHA loans required both an Up-Front Mortgage Insurance Premium (UPMIP), and for Mortgage Insurance Premiums (MIP) to be paid monthly.  There are two types of mortgage insurances required on FHA loans which is why conventional loans are being sought out in increasing numbers lately.
• Easy to cancel mortgage insurance  – As soon as your LTV reaches 80%, you can ask your lender to eliminate your mortgage insurance.  If you do not request to have it eliminated at 80%, it will automatically drop off at 78%.

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Conventional Loan Requirements 

Below are some of the basic requirements to get a conventional loan:

• Credit Score – There is no concrete credit score needed to qualify for a conventional loan, but generally you must have at least a 620 middle FICO score to qualify for any conventional loan products.
• Down Payment – Generally, you will need either a 3% down payment, or 5% equity to qualify for a conventional home loan…..
• Mortgage Insurance – Any mortgage that reaches a loan amount that is at least 80% of the appraised value must pay mortgage insurance.  This is known as PTI (private mortgage insurance).
• Debt-to-Income Ratio – Most loans will require that the monthly mortgage payment, along with monthly payments on other debts, not exceed more than 45% of your income (if you have a co-borrower than it is your combined income).  There are potential exceptions to this rule, but this is the general rule for DTI ratios.  Also, this is the maximum.  Some applicants will not qualify for a 45% DTI, and in some cases, can be as low as 36%.  The DTI that you can be approved for depends on a number of variables, such as the strength of your credit report, job history, and savings/assets. Keep in mind, there are ways to lower your DTI ratio such as financing PMI into a single payment wrapped into the loan amount.

Are you unable to meet these requirements?  You may want to consider an FHA loan, which is easier to qualify for (including allowing credit scores as low as 500).

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