Home buying certainly comes with its rewards. But the road to homeownership can be a challenging one. Most especially is the process of acquiring a loan with which to purchase that dream house. While some may have alternative options available (such as FHA or VA loans) most people will be applying for a conventional mortgage. This go-to choice offers many advantages, but it also requires certain qualifications. If you’re thinking about applying, here are some of the most important things we feel you should know about conventional loans.
Know The General Differences
So what is a conventional loan? Loans in general come in two basic categories: conforming and non-conforming. A conforming loan is a mortgage that is not backed by a third-party federal or governmental agency. Rather, these loans have been purchased by lenders and ‘conform’ to a certain set of standards as dictated by two agencies, Fannie Mae and/or Freddie Mac. These regulations mandate certain qualifications, such as a minimum credit score, debit-credit ratio, borrowing amount, and the purchasing of homeowners insurance.
Non-conforming loans, on the other hand, are backed by a third-party federal/governmental agency to guarantee the credibility of the person applying. One specific example is a VA loan, which is backed by the Department of Veterans Affairs and is used to assist military veterans in getting a residential home. Overall, non-conforming loans can help with obtaining approval for a mortgage, as the borrower has a credible agency stating they are worth loaning money to.
Low-income borrowers, those with lower credit scores and/or bankruptcy in their history also typically do best with non-conforming loans, since there are federally funded housing programs that utilize this type of mortgage. And on the opposite end of the spectrum, those looking to purchase more expensive homes would also apply for a non-conforming loan called a ‘jumbo loan.’
So, unless you are a military member, a low-income family, or intending to purchase a home for over $550,000, you will more than likely be applying for a conforming loan.
The Devil’s In The Details
Specifically, conforming loans are more widely available to consumers, offer lower interest rates and insurance premiums, and can have down payments as low as 3%. Additionally, they can be anywhere from 10 years to 30 years in length, with interest offered as either fixed or adjustable. Finally, one of the main perks of a conforming loan is that the house you’re purchasing doesn’t have to be your primary residence. It’s a great option for those looking to rent out to others or those looking to buy a second home.
In terms of non-conforming loans, there is no necessity to adhere to Fannie Mae and Freddie Mac guidelines. However, the rules for non-conforming loans vary widely, depending on the type of loan. For example, jumbo loans have very different qualifications than those VA loans. Interest rates, down payments, and credit score are several key items that vary, even though both of these loans fall under the category of non-conforming mortgages.
If you’ve decided a conventional loan is a right choice for you, what is the best way to proceed? First, be sure your credit score is in the best shape possible. Credit scores range from 300-850. Fair scores are around 600-680, while good scores are in the 700s. Excellent scores are above 800. Three major national credit bureaus keep track of your credit: Equifax, Experian, and TransUnion. Typically, you can get a free report from them once a year.
If you want to improve your credit score, pay off what debts you can so as to increase your debt to credit ratio. Additionally, paying your car payments, rent, and other bills on time will help to raise your numbers. Once you have your credit score in shape, you can move forward with your mortgage application.
Next, shop around to see who offers the best deals on interest rates, down payments, and minimum credit score requirements. Many agencies offer conventional loans, including banks, credit unions, and mortgage companies. And of course, be sure to get all of your paperwork in order. Lending companies will usually ask for valid photo IDs, bank statements, pay stubs, and any other proof of financial assets.
And when you begin your house hunting journey, most experts advise getting a real estate agent to assist you. Your agent will have familiarity with the market, your desired neighborhoods, and what to keep an eye out for when you are walking through a potential home. Additionally, they are experts in getting the best deal possible for you as the homebuyer. Much like mortgage companies, it would be wise to also search around for the right agent.
Ready to get started with your conventional loan? We’ve got quick quotes, low rates, and fast closings! Contact us today to apply!