Securing a Conventional Loan in the United States to Buy Your Dream Home

In the United States, a conventional loan refers to a loan which is not supported by the government. It is distinctly different from its terms and rates from other home loans which are approved by the Federal government (FHA) or the Department of Veterans Affairs (VA). In plain terms, it is a type of home loan that fulfills the requirements defined by the Fannie Mae (The Federal National Mortgage Association and Freddie Mac (The Federal Home Loan Mortgage Corporation) two government-sponsored agencies who release money for the Us housing market and have set fixed standard rules and regulations for home buyers in the country. Let us have a detailed description about the various aspects of a conventional mortgage loan.

Qualification Criteria

·         Credit - The general credit score required to get this loan is 620 but one can get a good mortgage rate with a 700-credit score. The most popular term of a conventional mortgage loan is 15 to 30 years and you can get a loan for 10 years or even an Adjustable Rate Mortgage (ARM).

·         Income - Income must be verified as part of the documentation for this loan. For minimal paperwork requirements, income can be verified using APM Express Lane Approval. Or, if you choose to go the standard method of document collection, you must provide 30 days’ pay slips, a record of 2 years W-2s,and tax returns for the previous 2 years, and an offer letter if the applicant has not started working.

·         Property–With APM Express Lane Approval there is a chance you will not need to pay for an appraisal. But If the home appraisal value comes in lower than the price noted on the purchase contract then you will have the opportunity to negotiate with the seller to lower the purchase price. Otherwise you would need to get some extra cash to cover the difference or you may want to consider finding a different property. Usually, the appraisal terms are not that strict compared to the FHA or VA loans.

Minimum Down Payment on a Conventional Mortgage Loan

The down payments for this loan are low but it has set the qualification criteria slightly tougher compared to VA loan and FHA loan. It is just a myth that conventional mortgage loan demands a 20 percent down payment. The minimum down payment is only 3 percent.

Borrowers who have paid 20 percent down payment will not require paying mortgage insurance premiums, which are a requirement with FHA loans.

Both sides of the credit history, the lender as well as the borrower are taken into consideration while figuring out the minimum required down payment.

Understanding Conventional Mortgage Loan Types, Conforming and Non-Conforming 

Conventional loans have two components conforming and non-conforming

·         Conforming Loan: A conforming loan refers to those loans which adhere to the standard guidelines of Fannie Mae and Freddie Mac. The important rule is the size of the loan; according to 2019 report, the maximum conforming loan amount to be given for a single-family home for the most parts of the country is $484,350. Those places where the cost of living is higher, for example Los Angeles and Orange County, California, allow a maximum loan amount of $726,525.

·         Non-Conforming Loans: Non-conforming loans are designed for people who cannot receive conventional financing either because the loan amount they are looking for is over $726,300 or they do not qualify under conventional guidelines. These loans pose a higher risk to lenders therefore many lenders do not offer them.

Non-QM Loans for Higher-Risk Borrowers

Other types of non-conforming loans are available to those borrowers who have poor credit background and/or have a recent bankruptcy, foreclosure, or short sale. The interest rates tend to be higher with non-qm loans but are a great tool for credit challenged borrowers.

Advantages of Conventional Loans

·         You can get a loan with a 30 year period and enjoy a low-interest rate. This helps you cover other expenses in life while having a minimal mortgage payment.

·         Conventional loans are suitable for those individuals who are not going to stay in their present house for long and look for a short-term adjustable mortgage rate. These loans typically offer even lower interest rates for 3, 5, 7, or 10-year periods. Though adjustable rates aren’t fixed for the term of the loan, they are fixed for a specific period, this gives a person more flexibility in their payment.

·         The absence of an up-front mortgage insurance fee is another benefit for the borrowers. Conventional loans only require mortgage insurance when the buyer’s down payment is less than 20 percent.

Final Words

Reportedly, the conventional loan homeowners occupy 65 percent of the market place and the absence of government support does not make it less appealing compared to other home loans in the market. It is extremely ideal for first time home buyers with a decent credit history.