In simple terms, conventional loans are loans that aren’t insured or guaranteed by the government. Loans like these conform to the conventional mortgage loan guidelines of GSE’s or Government Sponsored Enterprises such as Freddie Mac or Fannie Mae and they can either be conforming or nonconforming mortgages.
Conforming loans comply with the Freddie Mac and Fannie Mae guidelines, while nonconforming loans don’t, but are still considered conventional in nature.
General Requirements for Conventional Loans
Lenders typically look at the following when deciding if an individual is eligible for a conventional mortgage loan, as stated by the guidelines above:
- Monthly Income and Expenses: Standard 28/36 debt-to-income or DTI ratios, but can be exceeded based on specific compensation factors. To be more specific, the applicant’s monthly housing expenses — including loan interest and principal, insurance, and property taxes — should meet a specific percentage, 28% ratio, of their gross monthly income. In addition, the applicant should have sufficient income to pay for housing expenses, along with all applicable monthly debts not exceeding a ratio of 36%.
- Credit Rating: While credit rating standards for conventional loans are flexible, a 620 or higher FICO score is generally considered good.
- Your overall financial pattern, instead of individual financial issues in the past.
Down Payment Requirements
Down payment requirements for conventional loans may vary from one lender to another and depending on the specific loan type, but most require applicants to invest a minimum of 5% to 20% of the home’s purchase price in cash. To illustrate, if the home’s purchase price is pegged at $100,000, the applicant should invest a minimum of $5,000 up to $20,000.
So whether you are purchasing a home or looking to refinance your mortgage, consider applying for a conventional mortgage. If you’re concerned about the down payment or your credit history, conventional loans may be ideal for you due to its considerably lower down payment requirements, as well as lower closing costs.