Exploring Mortgage Options? Consider a Conventional Loan.
When purchasing a house, securing a mortgage loan is often necessary. As you delve into your financing choices, many loan types are available. Among them, a conventional loan frequently emerges as the preferred choice for many borrowers.
So, what exactly is a conventional mortgage loan, and how does it work? Let's delve into the details to understand what it entails and the qualifications required.
A government program doesn't directly back a conventional mortgage loan. Most conventional loans align with the criteria set by Fannie Mae or Freddie Mac, government-sponsored enterprises that purchase mortgages from lenders and facilitate more qualified buyers in achieving homeownership. These loans are available in various term options, with 15-year and 30-year terms being the most popular choices.
While specific borrower requirements can vary due to the diverse nature of conventional loans, they generally have stricter credit prerequisites than government-backed loans, such as Federal Housing Administration (FHA) loans.
You must meet specific eligibility criteria to secure a home with a conventional loan. Here's an overview of what's typically required:
First-time homebuyers may qualify for a conventional mortgage with a down payment as low as 3%. However, the down payment requirement can vary based on your circumstances and the property or loan type:
If your down payment is less than 20% of the home's value, you must pay for private mortgage insurance (PMI). PMI safeguards mortgage investors in case of loan defaults. The cost of PMI varies depending on factors such as loan type, credit score, and down payment size.
PMI can be integrated into your monthly mortgage payment or handled differently. Some buyers pay it as an upfront fee for closing costs, while others opt for a slightly higher interest rate. PMI isn't a permanent fixture; you can request its removal once you achieve 20% equity in your home.
In most cases, a credit score of at least 620 is required to qualify for a conventional loan. Lenders evaluate your credit history during the application process, and insufficient creditworthiness may lead to non-approval.
Your debt-to-income ratio (DTI) represents the percentage of your monthly income dedicated to debt payments. Lenders calculate DTI by summing the minimum monthly payments for all your debts (e.g., student loans, auto loans, credit cards) and dividing it by your gross monthly income. Most conventional loans permit up to a 50% DTI, but a lower DTI enhances your approval odds.
Conforming conventional loans must adhere to the loan limits established by Fannie Mae and Freddie Mac. In 2024, the conforming loan limit for a single-family home is $726,200. Exceptions exist for high-cost regions like Alaska and Hawaii, with higher limits up to $1,089,300. You can check loan limits for your area on the Federal Housing Finance Agency website.
If your property is located in a FHPA high cost area you maybe eligible to borrow at a larger loan amount.
Considering these qualifications, a conventional loan may be a suitable option to embark on your homeownership journey.
At Rate Simple, securing your dream home begins with the first step of the mortgage approval process. By initiating your application with us, you're taking the essential stride toward turning your homeownership aspirations into reality.