Conventional loans are one of the most common mortgage options for financing a home. These loans are not guaranteed by the federal government, but conform to guidelines set forth by Fannie Mae and Freddie Mac. Conventional loans tend to have stricter down payment and credit requirements than other loan options.
Conventional Mortgage Eligibility
Eligibility standards vary by lender, but generally, borrowers can expect the following in order to qualify for a conventional loan:
- A credit score of at least 620, though 680 or higher is generally preferred
- A down payment as low as 3%
- A debt-to-income ratio, including the mortgage payment, of no more than 43 percent (there are exceptions that may allow for up to 50 percent if you have high credit or lots of cash reserves)
- Additional guidelines may be required for past bankruptcies or foreclosures
For most income scenarios, Neighbors Bank will require copies of recent pay stubs, at least two months of bank statements, two years of federal tax returns if you have self-employment or rental income, and savings and retirement account statements. Additional documents may be required.
Pros and Cons of Conventional Loans
One of the biggest benefits of a conventional loan is that it comes with higher limits than other mortgage options. Conforming conventional loans go up to $484,350 in most areas, while nonconforming loans — also called “jumbo” loans — go much higher.
Other benefits of a conventional loan typically include:
- Competitive interest rates for those with good credit
- Can be used for second homes and investment properties
- High loan limits
- No PMI once you reach 80% LTV
The downside of conventional loans is that they typically have stricter credit and income requirements and also:
- Typically require a 5 to 20 percent down payment
- Will require private mortgage insurance if you can’t put down 20 percent
4 Things Homebuyers Should Know About Conventional Loans
If you’re considering a conventional loan for your upcoming home purchase, there are four things you’ll want to keep in mind as you are applying for your mortgage:
- Down payments typically start at 5 percent. Although 3 percent is allowed for some qualifying borrowers, it may mean higher interest rates and more spent on private mortgage insurance over the long term.
- You can cancel private mortgage insurance later on. If you put down less than 20 percent, your lender will most likely require private mortgage insurance (PMI) until you have at least 20 percent equity in the property. When this occurs, you may be able to cancel PMI with your lender. This is a key differentiator with conventional loans, as many FHA loans don’t allow borrowers to cancel their mortgage insurance at any point.
- There are no up-front mortgage insurance fees. With FHA loans, you’re required to pay both an up-front mortgage insurance premium and an annual one. Conventional loans do not require an up-front payment on your PMI.
- The qualifying guidelines may be stricter. Conventional loans are not backed by a government agency, which means credit and income standards may be more strict compared to government backed options.
Though conventional loans do have more strict eligibility requirements, borrowers with lower credit scores and a minimal down payment can still qualify. Talk with a Neighbors Bank home loan specialist to determine your eligibility.
Applying for a Conventional Loan
Take the next step and apply for a conventional loan with Neighbors Bank. Your Neighbors Bank home loan specialist will guide you through the conventional mortgage process and determine what loan program is best for your unique financial situation. Contact us today.