Conventional Mortgage – All You Need To Know

Conventional mortgage is a home loan which is not insured or guaranteed by government. It is typically issued by a bank or other private lender and requires the borrower to meet certain standards such as a minimum credit score, income level and down payment requirement. Conventional mortgages often have lower interest rates than government-backed loans but they also come with more stringent lending requirements.

How Conventional Mortgage Works

A conventional mortgage works by the borrower obtaining a loan from a lender to purchase a home. The borrower typically puts down a portion of the home’s purchase price as a down payment and the lender provides the rest of the funds needed to complete the transaction. The loan is secured by the property being purchased which means that if the borrower defaults on the loan then lender may foreclose on the property and take ownership.

The terms of a conventional mortgage such as the interest rate, length of the loan and monthly payments are agreed upon between the borrower and the lender. The monthly payments typically include both principal and interest and over time the borrower pays down the loan balance.

Conventional mortgages often require a higher credit score and down payment than government backed loans but they also often come with lower interest rates. Additionally, conventional mortgage lenders may offer a wider variety of loan products and flexible underwriting standards which can make it easier for borrowers to find a loan that fits their specific needs.

Required Documents To Apply For Mortgage

When applying for a mortgage you will typically be asked to provide a variety of documents to the lender to support your application. Some of the common documents are:

Proof of income: W2 forms, pay stubs, tax returns and bank statements to verify your income and employment history.

Proof of identity: A government-issued ID such as a driver’s license or passport to verify your identity.

Proof of assets: Bank statements and other financial documents to verify your savings, investments and other assets.

Credit report: A credit report from one or all of the major credit bureaus to assess your creditworthiness.

Proof of liability: Documentation of other debts and liabilities such as car loans, student loans and credit card balances.

Proof of insurance: Evidence of homeowners insurance which is typically required by lenders before they will approve a mortgage.

Proof of property ownership: A copy of the sales contract or other documents that prove you are the owner of the property you are purchasing.

This list may vary depending on the lender and the specific loan program you are applying for but these are some of the most common documents you will need to provide.

Who Qualifies For A Conventional Loan

To qualify for a conventional loan, you generally need to meet certain criteria set by the lender. Here are some common requirements:

Income: You will need to demonstrate a stable source of income and show that you have the ability to repay the loan. Lenders often require a minimum income and debt to income ratio.

Credit score: A minimum credit score of 620 or higher is typically required for a conventional loan although some lenders may accept a lower score.

Down payment: Conventional loans typically require a down payment of at least 5% of the home’s purchase price although some lenders may accept a lower amount.

Loan to value ratio: Your loan to value ratio which is calculated by dividing the loan amount by the value of the property must be within certain limits set by the lender.

Property type: Conventional loans are typically available for single family homes, townhomes and condominiums but not for investment properties or second homes.

Debt to income ratio: Your debt to income ratio which is calculated by dividing your total monthly debt payments by your gross monthly income must be below a certain level set by the lender.

Employment of employment: You must have a stable job with a history of consistent income to be eligible for a conventional loan.

Meeting these requirements does not guarantee that you will be approved for a conventional loan but it does increase your chances of being approved. Lenders may have additional requirements or consider other factors such as your employment history, income stability and debt load when evaluating your loan application.

Conforming Vs. Non Conforming Loan

A conforming loan is a mortgage loan that meets the guidelines and limits set by government sponsored enterprises (GSEs) such as Freddie Mac and Fannie Mae. These loans conform to standards such as maximum loan amount, credit score and debt to income ratio. Conforming loans are typically easier to obtain and have lower interest rates because they are considered less risky by lenders. A non conforming loan is also known as a jumbo loan is a mortgage loan that exceeds the maximum loan limits set by GSEs. Non conforming loans typically have higher interest rates and more stringent lending requirements because they are considered riskier by lenders.

Minimum Down Payment For Conventional Mortgage

The minimum down payment for a conventional mortgage is typically 5% of the purchase price of the home although some lenders may require a higher amount. The exact minimum down payment requirement can vary depending on factors such as your credit score, the type of property you are purchasing, and the loan program you are applying for.

Some lenders may offer conventional mortgage loans with a minimum down payment of 3% or even as low as 0% for certain borrowers who meet certain criteria. However, these loans may come with higher interest rates and more stringent lending requirements so it is important to carefully consider your options before choosing a loan.

Conventional Loans Vs Other Types Of Mortgages

Conventional loans are mortgage loans that are not insured or guaranteed by the government and are typically offered by private lenders such as banks, credit unions and mortgage companies. They have a set of guidelines known as underwriting criteria which the lender uses to determine whether to approve the loan. Other types of mortgages include:

FHA Loans: These are government insured loans that offer lower down payment options and are typically easier to qualify for than conventional loans.

VA Loans: These are loans available to veterans and active military members guaranteed by the Department of Veterans Affairs (VA).

USDA Loans: These are loans offered by the United States Department of Agriculture (USDA) for those who wish to purchase a home in a rural area.

Jumbo Loans: These are loans that exceed the conforming loan limits set by Fannie Mae and Freddie Mac and typically require a higher down payment and more stringent underwriting criteria.

Each type of loan has its own advantages and disadvantages so it’s important to understand the specific requirements and criteria before choosing a mortgage.

Conclusion

Conventional mortgage is a type of home loan that is not backed by the government such as FHA, VA or USDA loans and adheres to guidelines set by government sponsored entities (GSEs) Fannie Mae and Freddie Mac.It is issued by a private lender such as a bank or credit union and typically requires a down payment and strict underwriting criteria. Conventional loans often have lower interest rates and more flexible terms compared to government insured loans but also come with more risk for the borrower. The conclusion of a conventional loan process typically involves the closing of the loan, where the borrower signs the loan agreement and pays closing costs after which the loan funds are disbursed and the property is transferred to the borrower.