Conventional loans are a popular type of mortgage loan that are widely used by homebuyers to purchase or refinance a home. In this blog, we’ll take a closer look at conventional loans, their benefits, requirements, and the process of obtaining one.
What are Conventional Loans?
Conventional loans are mortgage loans that are not insured by the government. This means that they are not backed by the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). Instead, conventional loans are issued by private lenders, such as banks, credit unions, and mortgage companies.
Benefits of Conventional Loans
- Lower Down Payments: Conventional loans typically require a lower down payment compared to government-backed loans, such as FHA loans. This means that homebuyers can save on upfront costs and still be able to purchase a home.
- No Mortgage Insurance: Unlike FHA loans, conventional loans do not require mortgage insurance. This can save homebuyers hundreds of dollars each year.
- More Flexible Credit Score Requirements: Conventional loans have more flexible credit score requirements compared to government-backed loans. This means that homebuyers with lower credit scores may still be able to qualify for a loan.
- Lower Interest Rates: Conventional loans often have lower interest rates compared to government-backed loans. This can result in lower monthly payments and savings over the life of the loan.
Requirements for Conventional Loans
- Credit Score: To qualify for a conventional loan, homebuyers must have a minimum credit score of 620. However, many lenders may require a higher credit score to qualify for a loan.
- Income: Homebuyers must have a steady source of income to qualify for a conventional loan. Lenders will verify income and employment history to determine if homebuyers have the ability to repay the loan.
- Down Payment: Conventional loans typically require a down payment of at least 3% of the purchase price. However, some lenders may require a higher down payment.
- Debt-to-Income Ratio: Homebuyers must have a debt-to-income (DTI) ratio of 43% or lower to qualify for a conventional loan. The DTI ratio is calculated by dividing total monthly debt payments by gross monthly income.
The Process of Obtaining a Conventional Loan
To obtain a conventional loan, homebuyers must go through the following steps:
- Check Your Credit Score: The first step in obtaining a conventional loan is to check your credit score. A higher credit score can result in lower interest rates and better loan terms.
- Get Pre-Approved: Homebuyers should get pre-approved for a loan before they start shopping for a home. This can give them a better idea of how much they can afford to spend on a home and help them negotiate with sellers.
- Find a Lender: Homebuyers should compare mortgage rates and terms from different lenders to find the best loan for their needs. They should also look for lenders that have experience with conventional loans.
- Submit a Loan Application: Homebuyers will need to submit a loan application, including income and employment information, to the lender. The lender will then run a credit check and verify the information provided in the loan application.
- Provide Documentation: Homebuyers will need to provide documentation to the lender, such as pay stubs, tax returns, and bank statements, to support their loan application.
- Close the Loan: Once the loan is approved, homebuyers will need to sign the loan agreement and pay any closing costs