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Mortgage

What Is a Conventional Loan?

A conventional loan is a mortgage that is not backed by a government agency. Conventional loans are often also called "conforming" loans because they follow lending rules set by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).

Is a Conventional Loan Better Than a Government-Backed Loan?

The right loan depends on your financial situation. If you have high credit scores of at least 740 and you can afford to make a 20% down payment a conventional mortgage may offer the best interest rate and lowest fees. It can also be easier to qualify for a conventional mortgage. Loans backed by the VA and USDA have strict eligibility requirements.

If your credit scores are currently low, you may find it easier to obtain an FHA-insured loan. FHA-insured loans charge upfront fees and ongoing charges that add to your mortgage cost.

Improving your credit score before you apply for a mortgage can help you qualify for a conventional mortgage and may also reduce the mortgage interest rate and fees to obtain the loan.

Can I Get a Conventional Loan With a Low Down Payment?

The minimum down payment required for a conventional loan is 3%. A conventional loan that has a down payment of less than 20% will require you to also purchase private mortgage insurance, which protects your lender in the event you do not keep up with your payments.

Private mortgage insurance increases your cost of borrowing, however, you can cancel PMI once your mortgage balance is 80% or less of the appraised value of your home. Your lender will help you obtain PMI.

Government-backed loans from the FHA allow down payments as low as 3.5%. Mortgages backed by the VA and USDA can be obtained with no down payment, but you must meet certain eligibility requirements. There are upfront fees to obtain these loans, and FHA and USDA-backed loans have an ongoing fee similar to PMI.

Can I Get a Conventional Loan With a Low Credit Score

You typically need credit scores of at least 620 to qualify for a conventional loan. Your credit score and the size of your down payment will impact the interest rate you are offered on a conventional mortgage.

If your credit score is at least 740 and you make a minimum 3% down payment, your interest rate may have an additional 0.75% added on. If your credit score is around 620 and you make a 3% down payment the additional interest rate charge may be 3.5%. This extra interest rate charge is lower for loans with down payments of more than 5 percent.

If your credit score is below 620 you may want to consider an FHA-insured loan. Typically, a score of 580 is required to obtain a mortgage with a 3.5% down payment. If you make a down payment of 10% on an FHA-insured loan, your credit score can be even lower.

Will I Qualify for a Conventional Loan?

Your credit score is one factor in determining your eligibility for a conventional mortgage, but lenders will also look at your debt-to-income ratio (DTI).

Lenders typically want to see that your total monthly debts are no more than 36% of your monthly gross income. Lenders may stretch their required DTI to 43% or higher if you have very strong credit scores, large savings set aside, or are making a down payment of at least 20 percent.

Can I Qualify for a Conventional Loan With a Bankruptcy?

A past bankruptcy does not disqualify you from getting a conventional loan. Two years after completing a Chapter 13 repayment plan you will be eligible to apply for a conventional mortgage. The waiting period for a Chapter 7 bankruptcy is four years after your bankruptcy has been discharged.

How Much Can I Borrow With a Conventional Loan?

In 2018, the standard limit for a conventional mortgage is $453,100 for a single-family home that you intend to live in. For borrowers in high-cost areas the limit can be as high as $679,650.

For FHA-insured loans, the borrowing limit varies according to local living costs. In 2018, the limits range from $294,515 in low-cost areas to $679,650 in most high-cost areas. The FHA has a free online tool you can use to find the FHA and Fannie/Freddie lending limits in your county.

If you want to borrow more than those lending limits, you should look for lenders that specialize in jumbo mortgage loans.

What Types of Conventional Loans Are Available?

The most common type of conventional loan is a 30-year mortgage with a fixed interest rate. A term of 15 or 20 years are also options. You also can choose an adjustable-rate mortgage.

Will a Conventional Mortgage Impact My Credit Scores?

Adding a mortgage to your mix of credit will generally have a positive impacts on your credit score, depending on the rest of your credit profile because it increases the ‘mix" of types of credit you have. Generally, consumers who demonstrate they can manage several different types of credit are seen as less risky.

Once you apply for a mortgage, an inquiry will post to your credit file, which can have a very slight negative impact on your score. Your track record on making on-time debt payments accounts for 35% of your FICO credit scores.

Making on-time mortgage payments can help improve your credit score. Setting up an automatic mortgage payment each month from a checking account is a good way to avoid being late with a mortgage payment.

Where Can I Get a Conventional Loan?

Banks, credit unions, and online lenders offer conventional loans. Some lenders are also authorized to offer government-backed mortgages from the Federal Housing Authority (FHA), the Veterans Administration (VA) and the United States Department of Agriculture (USDA).

How Do I Apply for a Conventional Mortgage?

Finding a mortgage lender and submitting an application for a conventional mortgage is fairly simple and most of the time can be done online. You will need to gather documentation, such as:

  • 2 years of pay records (W-2s)
  • Bank statements
  • Tax returns
  • Investment statements.

When you are shopping for the best rates and submit mortgage applications at several lenders within a certain time period—typically 30 days—your FICO score will roll that into one inquiry on your credit report.

Should I Get Pre-Approved for a Mortgage?

Before you formally apply for a mortgage you may want to ask for a mortgage pre-approval.

A mortgage pre-approval is an estimate from a lender of how much you may be able to borrow and what interest rate you will be charged. When you are home shopping in an area where there are more buyers than sellers, being able to show a seller you have a mortgage pre-approval can make your bid stand out.

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