What Are Conventional Loans?
Summary: Conventional loans are a common loan type available to homebuyers. They come in two categories: conforming and nonconforming. They can be used on a primary, secondary, or an investment property, and are a good option for borrowers with strong credit scores. The requirements for a conventional loan can vary depending on the mortgage lender—make sure to contact yours for their up-to-date qualifications.
They are often serviced by banks, credit unions, mortgage lenders, and other financial institutions. Conventional loans can be fixed rate or adjustable rate loans offered in two categories: conforming and nonconforming.
Conforming loans follow guidelines— such as loan amount, credit scores, borrower’s debt, and more—set by the Federal Housing Finance Agency (FHFA). Examples of conventional conforming loans are fixed rate loans and adjustable rate loans (ARM). Nonconforming loans do not follow the guidelines set by the FHFA; they may require a higher credit score conforming loan limit set by FHFA annually. They are also termed a jumbo loan.
Conventional loans can be used on primary, secondary, or investment properties. Homeowners with less than 20% equity within their home will have private mortgage insurance (PMI), however, once the homeowner reaches 20% equity, they can request their mortgage lender to remove the PMI. At 22% equity, PMI is automatically removed.
Below are a few general requirements for a conventional loan.
- An ideal debt-to-income ratio of 43% or lower.
- A ratio of 50% can be accepted depending on the credit score.
- The minimum credit score depends on your mortgage lender.
- The following documentations:
- Proof of Income
- Lists of Assets
- Verification of Employment
- Copy of Driver’s License or State ID
- Social Security Number
All lenders are different, contact your mortgage lender for their specific requirements.
Conventional Housing Loan Process
If you are considering a conventional loan, here is a general breakdown of the steps:
- Contact A Credible Mortgage Broker/Lender
- Your mortgage lender will walk you through the process and collect all necessary documents.
- Mortgage lenders, such as Hall Financial, will give you a head start by deep diving into your finances.
- Get Pre-Approved
- A pre-approval estimates the loan amount, terms, and type available to the borrower.
- Borrowers can narrow their home search to homes they qualify for by using the information on the pre-approval letter.
- Start Shopping!
- Make an Offer on a Home
- Home Appraisal
- The appraisal helps determine the value of your potential home.
- Underwriting Review
- All information and loan terms need to be verified and approved by the underwriter.
- Close On Your Home
- Once all information has been verified and approved, it is time to close.
For more information, chat with us at callhallfirst.com or give us a call at 866-Call-Hall.